After months of being stuck on the tarmac, airline stocks are finally taking off. The ascent has been a long time coming, and shareholders worldwide are celebrating the day of their deliverance. Bulls are warming to virtually all carriers, but it’s Delta Air Lines (NYSE:DAL) that commands our attention today. DAL stock is itching for a breakout after Monday’s 4.5% jump, and I have two ways for you to score profits.
The narrative driving fresh strength into the airline industry is compelling. And while we could point to multiple bullish developments, it is ultimately the recent vaccine news driving the seismic sentiment shift. Hopes for a quick end to the novel coronavirus pandemic have turned into reality. The pace at which the scientific world created a vaccine has been record-setting. And the reported effectiveness rate of the pair of vaccines that were announced this month is exceeding even the most optimistic projections.
Sure, it will still be months before they becomes widely available. But Wall Street is in the business of looking far off into the future and pricing it in today.
If that past month is any indication (and it is), then the future has been weighed, measured and found worthy of much higher stock prices for airline stocks.
Additionally, a secondary market dynamic working to the benefit of DAL stock is the massive rotation from growth to value and large-caps to small-caps. The discrepancy between the growth-heavy Nasdaq and the small-cap laden Russell 2000 continues to grow. On Monday, the former Index closed unchanged on the session while the latter Index soared nearly 2%. It’s a microcosm of what we’ve seen for the entire month of November. The Russell 2000 is on pace for its best month in history, currently up 20.5%. According to LPL Research, February 2000 was the previous record holder with a gain of 16.4%.
The decimation of Delta’s share price earlier in the year means it now carries a much stronger correlation with small-cap value than large-cap growth. What’s good for the Russell is good for DAL stock, in other words.
DAL Stock Wants Higher
Delta’s weekly chart reveals two recent victories for bulls. First, the past three-week burst propelled DAL stock above the 50-week moving average for the first time since February. It marks another milestone on the stock’s road to recovery. Second, prices have risen past both major ceilings ($34 & $37) that formed this year. When a rally succeeds where its predecessors have so often failed, it suggests a more significant sea change is afoot. In this case, I believe it’s an omen worth betting on.
As always, the daily view reveals greater detail about the ongoing reversal. While the weekly vaulted above the 50-week average, the daily catapulted above the 200-day moving average. Ever since the Nov. 9 moonshot on the heels of the Pfizer (NYSE:PFE) vaccine news, the price action has been extremely constructive. The initial pullback was quickly bought, and we’ve since seen a textbook high base patter form near resistance.
Monday’s 4.5% pop jammed prices right back to the $39 ceiling, placing DAL stock a whisker away from another breakout.
Two Tempting Options Trades
The options market presents an ever-present trade-off between probability of profit and reward. You can build positions with a high probability of profit, but the accompanying profit will be small. Alternatively, you can structure plays with a high reward, but the corresponding odds of actually capturing the big payday will be small. With all of that in mind, let’s take a look at a trade suggestion for each using DAL stock.
High Probability, Low Reward Trade: Sell the Jan. $34 puts for $1.10. You have a 78% probability of capturing $110, or roughly a 30% return on the initial investment. This bet pays out if Delta is above $34 at expiration.
Low Probability, High Reward Trade: Buy the Jan. $40/$45 bull call spread for around $1.60. You have a 25% of capturing $3.40, or approximately a 213% return on investment. This bet pays out if DAL rises past $45 by expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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