Are airlines ready to take off? Some options traders seem to think so.
The ARCA Airline Index ($XAL) rose 2.2 percent Monday, its biggest gain in over a month. The move on the heels of strong weekly bookings data and followed a broader rally in the transportation sector.
Upside calls outnumbered downside puts by about 3 to 1 in Delta Air Lines (DAL), UAL (UAL) and American Airlines (AAL). Remember calls fix the price where investors can buy a stock, so they can appreciate when shares rally. The resulting leverage can let investors participate in a rally while risking much less capital than would be the case with equity. (See our Knowledge Center.)
DAL stood out the most, with 12,000 October 60 calls changing hands for $1.35. Those contracts expire after the company’s next quarter report around October 10, so the holder could benefit from potentially bullish earnings.
Airlines had a weak spell between late March and late June as markets grappled with geopolitical and trade uncertainty. Spiking energy costs and worries about price wars also hurt sentiment.
This week, however, brought a more upbeat tone. Analysts at Cowen yesterday said strong demand and less capacity growth would support fares. Bank of America Merrill Lynch also said weekly bookings had risen to their best level in 2018. Crude oil’s also pulled back.
DAL rose 3.18 percent to $57.42 on Monday. That was its highest close since late January.
In conclusion, airlines have been among the worst major groups in the market recently but now traders are looking for a turn.