Someone seems to think a major carrier may have reached its maximum altitude for now.
Check out the large options trade yesterday in American Airlines (AAL):
- A block of 37,778 March 36 puts was bought for $1.37.
- At the same time, a matching number of March 37 calls was sold for $1.47.
Owning puts fixes the price where a stock can be sold, so they make money to the downside. Selling calls generates income and creates an obligation to deliver shares above a certain level. Both are generally considered bearish because they have negative delta.
As our Knowledge Center explains, there’s significant risk in writing naked calls. However, it’s likely that Monday’s trader owns at least 3.78 million shares of AAL. (Remember each contract controls 100 shares.)
In that case, he or she has simply placed a hedge on their existing position. If it rallies over $37, they’ll have to relinquish their shares at that price. At the same time, they protected against a drop below $36. The strategy is sometimes known as a “collar” because it confines their potential exit price between two levels.
AAL rose 1.86 percent to $36.78. The company initially warned about weak profit on January 10 but then surprised to the upside two weeks later. It’s gained 15 percent since the start of January, clawing back from a 38 percent drop in 2018 and its lowest level in 2-1/2 years.
Some charts watchers may worry that AAL will hit resistance around the current $37 area because it’s near the price where the stock bounced last summer. That could help explain why the trader chose to implement the collar at $37.
Overall options volume was about twice AAL’s average over the last month, with the collar accounting for more than half the total.