Schaeffer's Trading Floor Blog

Delta Air Lines, Inc.: Will New Highs Force Option Bears to the Exits?

DAL has gained 50% in 2014, and continues to hit fresh record highs

by 6/3/2014 10:54 AM
Stocks quoted in this article:

Delta Air Lines, Inc. (NYSE:DAL) flew to a record high of $41.39 earlier this morning, following encouraging passenger data (subscription required) from last month. This is only the latest achievement for the stock, which is up roughly 50% on a year-to-date basis, and has outperformed the broader S&P 500 Index (SPX) by about 14 percentage points during the past two months. Nevertheless, sentiment is split, with Wall Street taking the bullish path, while option traders and short sellers increase their bearish exposure.

Getting into the specifics, an impressive 11 out of 12 covering analysts rate DAL a "buy" or better. What's more, the equity's consensus 12-month price target of $45.53 stands at a healthy 10.2% premium to the stock's current price of $41.25 -- and in uncharted territory.

However, during the last 50 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Delta has racked up a put/call volume ratio of 0.45. Although this ratio indicates calls have been bought to open at more than twice the pace of puts, the reading ranks in the 93rd percentile of its annual range. In other words, option traders have rarely scooped up bearish bets (relative to bullish) at a faster clip, looking back one year. Suffice it to say, a capitulation among these skeptics could yield significant tailwinds for the stock.

In a similar vein, short interest increased 11.3% during the latest reporting period. As a result, nearly 17 million DAL shares are currently sold short. Should the security continue to race to higher highs, the shorts may be forced to cover their bearish positions, intensifying buying pressure on the equity.

As alluded to earlier, Delta Air Lines, Inc. (NYSE:DAL) is 1.2% higher this morning, thanks to several encouraging metrics from May. Specifically, the airline's passenger traffic rose 5.8% year-over-year, capacity expanded by 3.6%, and passenger revenue per available seat mile (PRASM) grew by 7%.

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