The days of sky-high volatility in airline stocks seem to be ending. For proof, look no further than Wednesday’s return of 0% for Delta (NYSE:DAL). Perhaps traders have finally become numb to all of the doom. The blame certainly doesn’t lie with a lack of news. Daily headlines continue to pepper participants like DAL stock with the latest details of the seismic shifts striking the sector.
Many industries have roared back amid economies reopening, but air travel isn’t one of them. Just this week United Airlines (NYSE:UAL) warned of a tidal wave of layoffs if current trends persist.
Airline industry revenue has fallen off a cliff, requiring drastic measures to stave off bankruptcy. The company announced that as many as 36,000 could face furloughs this fall. We’re talking about almost half of its entire labor pool.
And how did UAL stock respond? With complete and total indifference.
While it wasn’t as picture-perfect as Deltas 0% move, at -0.06% it might as well have been. You could argue we’re reading too much into a single session’s performance, but I think it speaks to a broader theme playing out in some of the distressed areas of the market. Call it volatility fatigue. The shock factor has worn off, and short-term equilibrium has been found. It won’t last forever, but while it’s here, I think traders have to approach trading stocks like Delta and United differently.
We’ll focus on DAL stock, but the same principles apply to UAL and the rest of the airlines. Here are three ways to deal with what could be a new lower volatility regime.
Tighten Your Directional Bets
When the March massacre was in full swing, you could bank on double-digit percentage moves out of Delta and friends. The insanity continued throughout April, May, and even June. The epic volatility made aggressive directional strategies mighty attractive, and profitable. Buying out-of-the-money verticals like bull calls and bear puts offered high paydays and low cost. But, they required DAL stock to generate big swings. If we are indeed entering a slower-moving environment, then long OTM verticals may not work as well.
Instead, either go closer to the money with your strike selection or shift to higher probability trades that don’t require Delta shares to move as far. An example of the first tactic would be purchasing an August $35/$40 call vertical instead of shooting for the moon with a $45/$50 spread.
As for the second suggestion, credit spreads like bull puts will end up being a smarter trade if DAL stock stagnates for the next few weeks. Alternatively, if you want to lean bearish, then consider bear call spreads over buying out-of-the-money put spreads.
In either case, when making directional trades here, I would wait until Delta departs the new range. The stock is stuck in the middle the 20-day and 50-day moving averages, sandwiched between resistance at $38 and support at $31. Until we see a resolution of the stalemate, I’d hold off on pulling the trigger.
Add Options to Your DAL Stock Trades
The other way to increase your odds if Delta starts sleeping is to couple add options to your stock trades. The looming earnings report is keeping premiums bid up, increasing the payout for those willing to sell options. Essentially, you’re entering a covered call instead of long stock or a covered put instead of shorting stock.
Covered Call: If you think the support level of $31 holds firm, then buy the stock and sell the August $39 call for $2.
Covered Put: If you’re bearish, then wait for a break of $31 support and short the stock while selling the August $27 put for $2.
You’ll want to sell one contract per 100 shares traded. In both cases, you capture $200 of potential income and favorably shift your breakeven prices. The trade-off is you cap the gains on the stock position, but your return on investment is still quite high.
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