Airline stocks were on the move Thursday, with market-beating gains across the board.
Though they closed off the highs, the relative strength was still impressive. In addition, from a market capitalization perspective, small-caps saw heavy rotation into them early in the day. This provided a tailwind for the rally attempt for airlines.
The various air carriers have seen their share prices suffer over the past two quarters. I’ve been on the lookout for bottoming patterns and other signs that buyers were finally returning. Thursday was one such potential signal. Time and follow-through are needed to confirm the reversal, but now is as good a time as any to tee up trade ideas and otherwise prepare positions so you can enter when confirmation arrives.
There are many airlines to choose from. However, here are three of my favorite ways to play.
Let’s take a closer look at each chart and map out a smart way to profit.
Airline Stocks to Buy: Global Jets ETF (JETS)
JETS is always on the top of my list when playing airline stocks for two reasons. First, it’s a diversified vehicle providing a one-stop-shop for betting on the entire industry. Second, it’s low-priced enough to make options strategies like naked puts and covered calls cost-effective. Thursday’s high volume surge carried prices above the 50-day moving average to the upper end of its recent trading range.
In fairness to bears, they did succeed in pushing prices back below the 50-day by the closing bell, so the victory wasn’t as complete as I would have liked. Worse still, as I write this on Friday morning, airlines are losing altitude. The absence of any upside follow-through suggests we should remain cautious until the breakout arrives.
My line in the sand is $23.50. If JETS can rise above it, then we have a green light for deploying bullish plays. I prefer short puts due to the high return on investment potential. For now, I like selling the Oct $21 strike price.
Delta Air Lines (DAL)
If the idea of playing the entire industry with a diversified product like JETS doesn’t appeal to you, then consider picking a specific stock, like Delta. Its price chart is one of the better-looking ones in the space. For starters, its 20-day moving average has been flat for a month, showing stability and the potential for a bottom. Next, Thursday’s high-volume rally was able to close above the 50-day moving average.
The past two months have essentially built a clean trading range with well-defined support and resistance. On the top side, $42 is the level that needs to be breached for a new uptrend to begin. I suggest using that as your trigger for any bullish plays. Since cash flow trades have been working better than directional ones for most of the year, I’m again going with a short put idea.
Once we take out resistance ($42), sell the Oct $38 naked put.
Airline Stocks to Buy: American Airlines (AAL)
American Airlines rounds out today’s top stock trades with an imminent breakout of its own. Its flight path mirrors both JETS and DAL. With Thursday’s jump, AAL stock formed a higher pivot low. Unfortunately, the descending 50-day moving average proved too powerful. Friday’s 4+% sell-off reinforces its dominance.
But here’s the silver lining. We now know the level that needs to be broken before the bottoming attempt is complete: $20.50. If we can’t get above it, then all bets are off. If we can, however, then naked puts become mighty appealing. Currently, I like selling the Oct $18 puts once we get the trigger.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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