An Airline Pairs Play: United and American Airlines

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UAL stock AAL stock - An Airline Pairs Play: United and American Airlines

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It has been a year of very different flight paths for airline stocks United Continental (NYSE:UAL) and American Airlines (NASDAQ:AAL). But that relationship looks overdue for change and a nice opportunity for an options-based pairs trade in UAL stock and AAL stock. Let me explain.

UAL stock has been flying high of late. Long gone are worries and investor backlash aimed at parent company United Continental after a high-profile incident involving the improper removal of a passenger from one of its flights. In fact, UAL is up 29% this year and near recent record highs.

The same can’t be said for AAL stock.

While Wall Street can be quick to shake off scandalous behavior like United’s as a one-off-type event, continued problems for American Airlines ranging from unhedged and rising fuel costs to a massive computer failure causing more than 2,500 flights to be cancelled this summer has hurt and are still impacting the carrier’s bottom line.

Wall Street has certainly noticed American Airlines problems as AAL stock is off a sizable 17% in 2018.

The good news in all of this, as the provided price chart suggests, is that it could be time for bulls and bears to change seating assignments in both stocks — or at least provide a nice opportunity for an options-based pairs trade in UAL stock and AAL.

Weekly Comparison Chart of UAL Stock vs. AAL Stock

Weekly Comparison Chart of UAL Stock vs. AAL Stock
Source: Charts by TradingView

A weekly chart overlay of AAL stock onto the UAL chart shows a strong correlation over time in the two airline carriers. When one goes up, the other is almost certain to follow and vice versa. But 2018 has seen an unusual widening of the spread between the shares of both companies, which if history is any indicator, is unlikely to continue.

If we’re right, the actual narrowing of the price performance in United stock and American Airlines can occur in more than one way. But the way I like taking advantage of this pairs situation today is by selling a below-the-market put spread in UAL and buying a bull call spread in AAL stock.

Pairs Options Strategy for These Airline Stocks

With UAL at $89.10, selling the Oct $82.50/$77.50 put spread for a credit of around 55 cents and buying the AAL Oct $41/$43 call vertical for up to 65 cents looks interesting.

In a nutshell, if the bearish narrative in AAL begins to lose its appeal, shares of American are in a good position technically to outperform. My view is AAL stock could easily move higher even if UAL begins to stall or consolidate its own recent gains. That could lead to a profit of $1.90 for this pairs trade if AAL is able to rally about 7% into October expiration.

If both UAL and AAL rally, this pairs trade is in good position to profit too. Again though, this will be tied to American Airlines being the workhorse. But even if the spread between the two stocks narrows as both decline in price, this strategy may still walk away mostly unscathed.

For larger losses to occur, United’s put spread will need to trade in-the-money. If that doesn’t happen, the most this pairs trade can lose is the paid debit of around 10 cents. That said, as the UAL put spread is stationed within a band of sturdy chart support, getting long with contained risk during a corrective grounding in United Continental shares doesn’t sound like a bad idea either.

Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/an-airline-pairs-play-united-and-american-airlines/.

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