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American Airlines has been losing altitude for the last two months, and now an options trader is looking for new 52-week lows.
Check out this transaction in the carrier yesterday afternoon:
Both trades occurred at the same time and volume was more than 25 times open interest at both strikes. That suggests a trader implemented a bearish vertical spread. Let’s consider how it works.
Puts fix the price where security can be sold. Buying them can help investors profit from a drop because the contracts gain value when shares decline. Another possibility is selling puts. That generates premium in return for a pledge to buy at the strike price.
A vertical spread combines long and short positions to leverage a move between two levels. In this case, the trader will sell AAL at $13.50 and buy it back at $11.50. They keep the $2 difference (or “spread”) if the stock closes under $11.50 on expiration. Considering their net cost of $0.51, that would translate into a profit of 292 percent from the stock moving 16 percent.
The position will expire worthless if the shares close above $13.50 on expiration three weeks from now.
AAL was trading at $13.72 when the transaction hit, but ended the session at $13.50.
The company has struggled along with other airlines because of rising energy costs and wages. Management raised its forecast for second-quarter revenue growth from 6-8 percent to 11-13 percent on June 3. But the fuel budget rose by 7 percent and pilots subsequently received bigger raises. Executives next abandoned smaller markets like Toledo, Ohio, and Ithaca, New York, because of pilot shortages.
The stock has lost more than one-third of its value since a failed rally attempt on April 21. Tuesday’s put spread targeted $11.50, which AAL hasn’t seen since Pfizer (PFE) announced the successful development of its coronavirus vaccine in November 2020.
Puts in the airline outnumbered calls by a bearish 2-to-1 ratio, according to TradeStation data.
A similarly bearish transaction occurred in cruise-ship operator Carnival (CCL) a month ago.
Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See Characteristics and Risks of Standardized Options. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.
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