United Airlines Stock Is Poised for Lift Off After Encountering Turbulence

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Shares of United Airlines (NYSE:UAL) have certainly been under severe selling pressure over the past two weeks. United Airlines stock had fallen nearly 17% from the Jan. 17 highs at $89.70 before finally rebounding yesterday. A slightly weaker earnings report and coronavirus fears undoubtedly were a factor for some of the selling. Although a pullback was warranted, the magnitude of the selling is now way overdone. Time for UAL to take off.

United Airlines Stock Is Poised for Lift Off After Encountering Turbulence

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The coronavirus fears have assuredly had an impact on United Airlines. The company has suspended some flights and reduced the number of outbound flights from 12 flights a day to only 3 or 4. Although not inconsequential, China represents less than 4% of all international seats for United according to Austin Horowitz, senior aviation management consultant at the global consulting firm ICF. A drop in the stock would be one thing, but a pummeling is quite another given the China exposure. The overreaction sets up nicely for a counter-trend rally in United Airlines stock.

The stock is extremely cheap from a historic valuation perspective. Price-to-cash-flow is under 3 and at the lowest levels of the past decade. Price-to-book is just 1.7 and also at the cheapest ratio in the past 10 years. The current price-to-earnings ratio stands at just 6.5 and price-to-sales is only 0.5. This stands in stark contrast to the S&P 500, which sports the highest price-to-sales ratio in the past decade at 2.36. United Airlines stock is certainly dirt cheap on both an actual and comparative basis.

The technical picture got to extremely oversold levels before finally strengthening yesterday. The 14-day RSI reached the lowest readings in the past two years before turning higher. Previous instances when it pierced 30 proved to be significant short-term lows in United Airlines stock. The MACD was also at an extreme, printing under -1.00. Bollinger Percent B went negative before flipping back into positive territory. There is major downside support at $73, which coincides with the earnings gap from July 2018. UAL is trading at the largest discount to the 20-day moving average in the past two years, another sign the selling likely has gotten overdone.

United Airlines stock chart

Source: The thinkorswim® platform from TD Ameritrade

How to Approach United Airlines Stock Today

More importantly, United Airlines stock reversed sharply off the lows yesterday. Shares opened lower and briefly traded below $75 before turning much higher. Shares closed up over $2.50 points and just off the highs off the day. This type of key reversal pattern is many times emblematic of a low in the stock. The sellers have become exhausted and the buyers have taken control. It is even more powerful after such a brutal and extended drop like the most recent one for United Airlines.

Stock traders should look to be a buyer of United Airlines stock on any weakness. The initial upside profit target would be a move back to fill the gap at the $82 area. A meaningful break of support at $73 would serve as a viable stop out price.

Option traders may want to take advantage of heightened implied volatility (IV). Current IV sits at the 92nd percentile, meaning option prices are comparatively very expensive. This favors option selling strategies when constructing trades.

Selling the March $72.50/$70 put bull put spread would bring in a 50 cents net credit. Maximum gain on the trade is $50 per spread with maximum risk of $200 per spread. Return on risk is 25%. The short $72.50 strike price is below the major support area of $73 and provides a 6.8% downside cushion to the $77.75 closing price of United Airlines stock.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


Article printed from InvestorPlace Media, https://investorplace.com/2020/01/united-airlines-stock-is-poised-for-lift-off-after-encountering-turbulence/.

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