Shares of Delta Air Lines, Inc (DAL) made a new annual low yesterday, closing at $38.89. This was despite the fact that oil prices have moved lower recently and are trading back below $50 per barrel, normally a benefit to airline stocks like Delta.
With DAL stock now down 25% since the beginning of the year, shares of DAL are starting to look attractive at current levels.
Normally having a fairly high beta (meaning it moves along pretty much stride for stride with the overall market), DAL stock has recently underperformed dramatically, as seen in the chart below.
Since making a recent high of $48.49 on April 14, Delta stock has dropped nearly 20%, while the S&P 500 Index has stayed virtually flat. I look for this comparative differential to revert back, with shares of DAL outperforming the overall market in the coming weeks.
Click to Enlarge Delta stock is also getting extremely oversold on a technical basis, with the 14-day RSI now below the oversold reading of 30.
Similar instances over the past year corresponded to significant short-term lows in the price of Delta stock. The $39 level also has proven to be significant long-term support, with shares bouncing sharply off this level several times over the past year.
Click to Enlarge Bollinger band analysis, which incorporates a volatility component into the mix, is also indicating that DAL is getting deeply oversold. Delta stock just broke through the lower Bollinger band, which has been a solid buy signal in the past year.
From a fundamental standpoint, DAL stock is trading at a price-earnings ratio of only 6.5, certainly not expensive, and by far the cheapest level over the past year.
Click to Enlarge With a consensus earnings estimate of $6.72 for 2017, Delta is trading at less than six times earnings on a forward basis.
DAL Stock Options
So with DAL stock now dirt cheap, deeply oversold and trading at levels last seen in October 2014, I think a short-term rally may be in the offing. To position for a pop, a long call spread makes probabilistic sense at these levels.
Buy the DAL July $39 calls and sell the DAL July $41 calls for a 85 cents net debit. These are the regular monthly options that expire July 15.
The maximum risk on the trade is $85 per spread, with the maximum gain of $115 per spread. Potential return on risk is 135%.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.
