Market Insights

Southwest Airlines reports earnings this afternoon, and one big trader is using options to shield against potential turbulence.

This large transaction occurred yesterday in the Dallas-based carrier:

• 13,408 31-October 31 puts were sold for $0.37.
• 13,408 31-October 33 puts were purchased for $0.87.
• Volume was below open interest in the 31s but not the 33s. That suggests an existing position was closed and rolled to the higher strike.

Puts fix the price where a security can be sold. Investors often buy them to hedge against downside, limiting risk during big events like earnings.

In the case of yesterday’s trade, the investor may own at least 1.34 million shares. The protective puts can limit losses in the event of a selloff. If the company rallies, they can still profit from upside in the stock. Making the adjustment cost a $0.50.

LUV rose 0.73 percent to $34.68 yesterday. Prices chopped in a sideways range since August, consolidating near their 50-, 100- and 200-day moving averages.

Southwest Airlines (LUV), daily chart, with select indicators.

Competitors Delta Airlines (DAL) and United Airlines (UAL) issued strong results and guidance earlier in the month. Despite the positive numbers, airlines face potential risks if the government shutdown interferes with air-traffic controllers.

Overall option volume in LUV was about twice the daily average, according to TradeStation data. Puts outnumbered calls by more than 3-to-1.

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