The collapse in oil prices is providing a tailwind for DAL stock as Delta Air Lines, Inc. (DAL) cruises toward next week’s fourth-quarter earnings report.
While Delta hedges a portion of its fuel costs, the company stated in a recent release that its net fuel costs would fall by $1.68 billion between Oct. 1, 2014 and Dec. 31, 2015. But will Delta’s improving fuel situation be enough to overcome the recent market malaise?
Currently, Wall Street is forecasting a profit of 75 cents per share from Delta, but expectations have been on the rise during recent months, as analysts adjust their targets to match plunging oil prices and rising airline traffic. As a result, EarningsWhisper.com reports that the whisper number for Delta’ fourth-quarter earnings arrives 2 cents higher at 77 cents per share.
Judging from the company’s fundamental performance during the past three years, betting on an earnings beat from Delta isn’t a bad idea. In fact, the company has matched or bested Wall Street’s in every quarter during this time frame, according to Zacks data.
Analysts have certainly taken note of the strength in Delta stock. For instance, Thomson/First Call reveals that 16 of the 18 analysts following DAL stock rate it a “buy” or better, compared to two “holds,” and no “sell” ratings.
Meanwhile, the 12-month price target of $58.50 represents a sizeable premium of nearly 30% to DAL’s close at $45.31 on Wednesday. The only downside here is that there is very little wiggle room for upgrades are price increases, and a wealth of room for downgrades and cuts if Delta fails to live up to expectations.
Turning to DAL stock options activity, we find that the bulls are running rampant. In fact, the January/February put/call open interest ratio arrives at 0.33, as call open interest roughly triples put open interest among near-term options. Peak call open interest here totals 23,655 contracts at the deep out-of-the-money Feb $50 strike, while another 15,789 contracts are open at the overhead Feb $47 strike.
Click to Enlarge Overall, weekly Jan 23 implieds are pricing in a potential post-earnings move of about 5.6% for DAL stock. This places the upper bound near $47.50, while the lower bound lies at $42.50. A post-earnings rally would vault DAL stock past short-term trendline resistance, with follow-through buying potentially setting the stock up for another challenge at the $50 level.
A downside move, on the other hand, could gain enough momentum in the current market environment to send DAL down for a test of support near $40 and its 200-day moving average.
With a solid track record on the earnings front and the potential for another beat next week, DAL stock looks attractive for a potential bullish position heading into next week’s report — especially with the shares trading at short-term oversold levels.
2 Trades for DAL Stock
Call Spread: Traders looking to position themselves ahead of Delta’s report might want to consider entering a Feb $45/$47 bull call spread. At the close of trading last night, this spread was offered at 99 cents, or $99 per pair of contracts. Breakeven lies at $45.99, while a maximum profit of $1.01, or $101 per pair of contracts, is possible if DAL stock closes at or above $47 when Feb. options expire.
Take note that it is possible to double your initial investment on this trade (at $46.98) even if DAL does not close at or above $47, so make sure to have a limit order set to lock in profits.
Put Sell: Alternately, if you’re a bit more reserved in your post-earnings expectations for DAL stock, you could look into a bull put sell position. Along those lines, a weekly Jan 23 $40 put sell might be a way to capitalize on DAL’s technical support in the $40-$41 region.
After the close last night, the Jan 23 $40 put was bid at 11 cents, or $11 per contract. The upside to this put sell strategy is that you keep the premium as long as DAL stock closes above $40 when September options expire. The downside is that should DAL trade below $40 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $40 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
