Following a run for the ages, airline stocks are finally running out of fuel. And for some reason, traders are shunning the trajectory turnaround in names like United Airlines (NASDAQ:UAL) stock.
Instead, they should be embracing the switch. This pullback is desperately needed to prevent what likely would have become a larger crash down the road. UAL stock already slipped 8% on Tuesday and is down another 11.6% in intraday trading today.
Let’s use UAL stock to analyze the retreat. Then, we’ll build out a trade idea for how you can profit.
Robinhood Comes to the Rescue
One of the fascinating drivers of the massive rally in beaten-down airlines has been the explosion in interest from retail traders. It’s a phenomenon born of unique circumstances. Stay-at-home orders echoed across the nation in response to the novel coronavirus. Consumers suddenly had tons of free time. A specific subset of the population decided to use that time playing on Wall Street.
Online brokerage firms from E*Trade (NASDAQ:ETFC) and TD Ameritrade (NASDAQ:AMTD) to Charles Schwab (NYSE:SCHW) and Interactive Brokers (NASDAQ:IBKR) have reported a flood of new accounts in 2020. But it’s Robinhood that arguably stands above the rest. With its slick app and super-simple interface, Robinhood is an extremely popular gateway for millennials to enter the investing realm.
And then there’s the flood of stimulus checks that made the trek from the U.S. Treasury to bank accounts everywhere. While many used the cash to pay bills and rent, some used it as seed money for their new trading venture.
Finally, with professional sports now shut down for months, you have a legion of sports bettors that could be using stocks to scratch their speculation itch. The cheapness of airlines like UAL stock, combined with their monster volatility, makes them ideal targets for speculators looking to make a quick buck.
The Pullback for UAL Stock Has Arrived
As we’ve seen, these ingredients have created quite the bullish brew. But there are limits to the sustainability of a parabolic rise like this. Airlines can’t double every week. It’s entirely unrealistic. Eventually, even the most committed believers will feel the pull to take profits.
And we haven’t even gotten to the actual fundamentals of airlines. Travel demand is improving, but it’s still a shell of its former self. It’s going to take a long time until we go back to where we were. For the type of price movement we’ve seen from UAL stock over the past two weeks to continue, we would need to see a much more rapid return to normal. Color me skeptical.
That said, it doesn’t mean we can’t morph into a more gradual uptrend. Given the strength behind the surge, I’m entertaining bullish ideas into this pullback. There are many (like me) who missed the initial price jump and are waiting on the sidelines to get in at better prices.
This retracement is providing just such an opportunity.
I’m eyeing two old resistance zones that have the potential to become support — $40 and $33. It’s going to take a substantial selloff to return to $33, but I’m not counting anything out given the stock’s volatile history.
Two Trades to Consider
If you’re trading UAL stock, consider waiting for a break of a previous day’s high to signal the next advance has begun. For options traders, the sky-high implied volatility makes selling puts an exciting proposition. Using July options allows us to go far out-of-the-money while still capturing a high return on investment.
The Trade: Sell the July $30 puts for around $1.50.
Consider it a bet that UAL sits above $30 at expiration. The market is pricing in an 84% chance of success. The max reward is limited to $1.50. By selling the put, you are obligating yourself to buy 100 shares at an effective purchase price of $28.50. You can sidestep assignment, however, by buying back the put if it’s in-the-money near expiration. I’d wait to enter the trade until UAL takes out a prior day’s high. If its pullback continues, you’ll get a better price for the put later in the week.
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