Shares of American Airlines (NASDAQ:AAL) seem to have finally found some support after a sharp descent. AAL stock traded all the way up to $22.80 intraday on June 5, only to subsequently plunge back to the $12.50 area three weeks later.
Certainly some of the selloff was warranted, given the misguided optimism that drove the previous rally. In a similar fashion, the pervasive pessimism has taken AAL down too far, too fast.
Look for American Airlines to begin to ascend over the coming weeks.
Looking Ahead in American Airlines
Currently the technicals reached oversold readings but are beginning to improve. The 5-day RSI dropped below 30 but has since turned higher. Previous times this occurred marked significant short-term lows in the stock. MACD also hit oversold levels but is starting to improve. Momentum crashed to deeply negative territory but has regained most of the plunge and looks poised to turn positive.
Click to Enlarge Most importantly, AAL stock once again held the crucial $12.50 support area. Yesterday saw a big reversal day with American briefly trading down to $12.02 only to pivot and close higher on the day at $13.32. This type of price action is many times a sign that the sellers have become exhausted and the buyers have taken control. It is especially powerful given that it took place at a major support area.
Load factors, a key component for the major carriers, has shown a tremendous rebound from the corona virus lows. It shows the percentage of available seats that passengers have booked. The chart below shows that load factors are approaching levels near 75%. Although they are still below the 80% area seen recently, it is a dramatic improvement from just a month ago. This should provide some semblance of sanity for airline stocks going forward.
Click to Enlarge Much of the increased load factor can be attributed to airlines being able to cancel flights that they previously were bound to fly. This rule was put in place for the airlines to qualify for the $50 billion dollar federal aid package. The restrictions have been eased lately. Airlines are able to cancel and consolidate flights to lower their costs to survive.
American did announce earlier this month that it will be adding back some domestic flights in July as passenger demand has picked up. Average daily passenger numbers improved to more than 100,00 in late May from just 32,000 in April. American Airlines is expected to fly more than 55% of their July 2019 schedule as summer travel increases.
In my previous post on AAL stock from June 10, I had a decidedly bearish outlook for American. It had gotten to extremely overbought levels on a technical basis and looked prime for a pullback. I recommended selling a bear call spread to take a guardedly bearish position. The trade proved to be profitable as AAL stock began to fall from those lofty levels.
Now my position has turned somewhat bullish, as the technicals reached oversold levels and support held. Implied volatility (IV) for AAL options has tempered somewhat from the prior frothy levels nearing 150, but is still well over 100. This makes option selling strategies still very viable. So to position for lift off in AAL stock a bullish put credit spred makes sense.
AAL Stock Trade Idea
Sell the AAL July $12/$10 put spread for a 45-cent net credit
Maximum gain on the trade is $45 per spread with maximum risk of $155 per spread. Return on risk is 29%. The short $12 strike is below the major support area at $12.50 and provides a nearly 10% downside cushion to the current level of AAL 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 weekly option and volatility newsletter can visit the Options and Volatility Newsletter website.
