Airline stocks are losing altitude. Chief among them is Delta Air Lines, Inc. (DAL) which has been cruising lower all Spring long. Blame it on the relentless bid in oil, which tagged $50 this week.
Or, perhaps blame lies with some random turbulence inducing air pocket.
Regardless of the reason, the fact is airliners are descending; and despite a broader stock market that is clawing its way back to former heights. DAL looks particularly vulnerable here.
First, let’s take a quick look at the big picture at the airline industry. For that we turn to the NYSE ARCA Airline Index (XAL).
Since last month’s reversal, XAL has descended below all major moving averages. What’s more, they’re all now falling, suggesting the trend for airlines on all time frames is pointing lower.
The choppity-chop in XAL over the past few weeks has taken on the form of a low base which is providing an interesting breakdown setups for short sellers. Should XAL breach $82.50, watch out below.
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Which brings us to Delta stock. DAL has been able to rebound slightly off its recent lows. With the trend still pointing lower consider the rally a ruse, an opportunity for bears to sally forth with less risk.
Should Thursday’s low of $42.40 fail, DAL stock will likely plunge back to the $40 zone, which has provided support for the past few years.
DAL Bear Put Spreads
With implied volatility in the dumps these days DAL stock option can be scooped up on the cheap. The July $43/$40 bear put spread looks particularly attractive.
To initiate the position, buy to open the July $43 put while selling to open the July $40 put for a net debit around $1.
The risk is limited to the initial $1 and will be lost if Delta stock sits above $43 at expiration.
The reward is limited to the distance between strikes minus the initial debit, or $2, and will be captured if the stock can fall below $40 by expiration.
If you think Delta’s descent is inevitable you could enter the trade immediately. Otherwise, wait for a break of $42.40 before pulling the trigger.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
