How to Trade Delta Air Lines Ahead of Next Week’s Earnings Report

The will-they-won’t-they stimulus game has stolen the headlines. And airline stocks are once again being roiled with every Trump tweet. Given the wicked day-to-day gyrations seen in the likes of Delta Air Lines (NYSE:DAL) and crew, it’s a wonder why any short-term traders would bother with trading DAL stock or others in the industry at all. Particularly when there is so much low-hanging fruit in the tech sector.

delta (dal stock) airlines plane
Source: Markus Mainka /

Ah, but Oct. 13 is just days away and that’s when the carrier reports third-quarter earnings, which could provide a catalyst for new trade ideas. After breaking down Delta’s lackluster price chart, we’ll dissect what the options market is saying about volatility expectations surrounding the event.

Turbulent Holding Pattern for DAL Stock

Delta Airlines (DAL) stock is in a sideways range
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade
Source: The thinkorswim® platform from TD Ameritrade

The report will be rough, Barron’s noted earlier this week. Delta is expected to report a pretax loss of $2.4 billion, with revenue plunging 74% to $3.2 billion. Analysts expect the airline to report an adjusted loss of $3.08 a share.

DAL stock finds itself flying a circuitous route to nowhere. It first fell to $32 on March 16, and yet here we are seven months later wrestling with the same level. Meanwhile, the small cap-laden Russell 2000 index has recovered the lion’s share of its losses. The stark relative weakness speaks to the continued stigma hanging over airline stocks following the global pandemic. Air traffic remains a far cry from its pre-novel coronavirus heights, and the balance sheets of everyone from Delta to American Airlines (NASDAQ:AAL) is in shambles.

Talk of another round of stimulus and bailouts fuels bullish hopes, but the chart remains a mess. We’ve seen multiple attempts to rise anew since March, but ultimately DAL stock price couldn’t achieve enough lift. If there’s one thing that investing in beaten-down airlines has required, it’s patience. But it’s one thing to sit tight while the rest of the market is acting like garbage. It’s quite another to stay satisfied with your dead-money holdings when everyone else is on a rocket ship ride to the moon.

One price zone to focus on is $35. It marks the high of Delta’s recent range as well as the 200-day moving average. Pushing above it would signal to spectators that a new uptrend has begun.

Volatility Expectations

If you’re expecting fireworks out of next Tuesday’s report, then prepare to be disappointed. For starters, every day is like an earnings announcement for DAL stock these days. Large percentage moves are the norm. As a result, implied volatility hasn’t experienced any sort of ramp into the event. It’s still high on an absolute basis at 73%, but relative to the insane heights reached during the March massacre, it’s low. We’re officially perched at the 18th percentile of its one-year range.

We can look at the cost of the straddle that expires on Oct. 16 to gauge just how much movement is being baked in. The $32-strike straddle trades for $2.82. That translates into an expected move of 8.8% over the next week. Given the day-to-day volatility of late, it seems fair — which is unfortunate. If premiums appeared overly juicy or too cheap, we could build a strategy to capitalize. As is, however, I see no edge.

Trading Choices

Ultimately, I think we have two choices to trade the stock here.

Wait for earnings to pass and price to push past the 200-day. Then you can enter with confidence that Delta has mustered the strength to break free of its range finally.

Or … if you can’t help but buy now in anticipation of some future rise, then at least use options to lower your cost basis. Either sell November naked puts at lower strikes or sell covered calls a stock purchase. That way, you’ll get paid to wait if DAL stock continues to tread water.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!

Article printed from InvestorPlace Media,

©2021 InvestorPlace Media, LLC