The volatile saga of airline stocks took a turn for the worse on Thursday as investors fled the market. Garden variety profit-taking is one thing, but the breadth and depth of the downturn tells me traders were spooked. Delta Air Lines (NYSE:DAL) fell from the sky, diving 14% on the session. If you’re viewing the DAL stock dip as buyable, I have a smart options trade idea.
It’s not fair to pin the panic on one specific catalyst. Some are citing the Federal Reserve’s dour forecasts outlined during this week’s Federal Open Market Committee meeting. The almighty seers steering the money ship have looked far off and concluded that near-zero interest rates are here to stay until at least 2022. Economic weakness demands as much. Captain Jerome Powell and crew expect the economy to shrink by 6.5% this year. Perhaps the grim forecast threw cold water on a market that’s been riding high on optimism.
Others suggest the selling frenzy was born from concerns of an uptick in novel coronavirus cases as economies reopen. According to Johns Hopkins University, some states like Arizona, South Carolina and Texas have seen a rise in cases as citizens emerge to shop and travel. If this trend continues, the return to “normalcy” will hit further stumbling blocks.
A final explanation for airlines like DAL stock crumbling was that we had reached an extreme in bullish sentiment. The massive moves and volume driving beaten-down areas like airlines, cruise operators, restaurants and oil stocks was astounding. The overbought nature of Delta and its friends hinted that a pullback was coming. The parabolic ascent in the Nasdaq Composite also suggested a cooling was needed. What’s caught so many by surprise is the speed and magnitude of the drop.
Feel free to cling to your preferred narrative. What matters to me is whether DAL stock broke support, or whether its nascent uptrend is intact. Let’s take a closer look.
A Look at the Delta Stock Chart
From last Friday’s peak, Delta shares have fallen 27%. Usually, a drop of that magnitude would push a stock below support and turn the trend upside down. But DAL stock’s behavior has been abnormal. It was so extended that all this week’s massive haircut did was return Delta to its rising 20-day moving average. The $27 zone is also the scene of its breakout.
What bulls need to see now is for the principle of polarity to hold true. It states that old resistance becomes new support. If buyers step up and defend this potential floor, then the short-term uptrend will remain intact. That would be the cleanest outcome. A push lower from here jeopardizes the breakout and makes the price chart unnecessarily messy.
We saw a pop in implied volatility on Thursday, which is making options selling strategies more lucrative. Rather than buying DAL stock outright, I prefer using the juiced-up premiums to my advantage. To do this, we either buy DAL stock and sell covered calls or sell a naked put.
The latter choice is cheaper, so we’ll stick with that. The naked put allows us to get paid for our willingness to buy shares.
How to Trade DAL Stock
The Trade: Sell the July $21 puts for around $1.10.
If DAL sits above $21 at expiration, you will capture the max reward of $1.10. If it falls below that, you are obligated to buy 100 shares at an effective purchase price of $19.90. That might not be a bad entry price if you believe the stock will ultimately recover.
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