Schaeffer's Trading Floor Blog

Option Bears See Delta Air Lines, Inc. (DAL) Headed South

Positive news, technicals have yet to squelch skepticism on Delta Air Lines, Inc.

by 5/15/2014 11:43 AM
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Delta Air Lines, Inc. (NYSE:DAL) is off nearly 2% today at $37.70, despite encouraging news over the last couple of days. In particular, J.D. Power and Associates found that DAL ranked behind only Alaska Air Group, Inc. (NYSE:ALK) in terms of customer satisfaction this past year; also, the trade group Airlines for America expects air travel to reach its highest level in six years this summer. Still, these fundamental developments haven't been enough to persuade option traders to change their pessimistic stance toward DAL.

In fact, levels of bearishness are approaching an annual peak at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Delta's 10-day put/call volume ratio across those exchanges checks in at 1.16, with bearish bets outstripping bullish in recent weeks. What's more, this ratio rests just 1 percentage point from a 12-month high, demonstrating traders have had a much stronger-than-usual appetite for long puts, relative to long calls, during the previous 10 sessions.

Digging deeper, DAL's May 35 strike is home to peak front-month put open interest, with more than 11,100 contracts in residence. A significant number of these puts were bought to open over the past month and a half, suggesting speculators are eyeing a short-term pullback (though it's also possible some of these individuals are shareholders picking up the contracts to serve as hedges).

Things are much different on Wall Street, where 11 out of 12 covering analysts have assigned Delta a "buy" or "strong buy" rating. The lone dissenter sports a tepid "hold" recommendation, with not a single "sell" in sight. If that's not enough, the stock's consensus 12-month price target of $45.53 sits at a healthy premium to the current share price.

Based on Delta Air Lines, Inc.'s (NYSE:DAL) longer-term technical performance, the Street's optimism is understandable. During the last year, the shares have nearly doubled in value. More recently, the stock has found a layer of support in the form of its 20-week moving average, which has been ushering DAL higher since January. If this positive momentum continues, it could shake some of the weaker bearish hands loose, resulting in additional buying pressure on the stock.

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