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Option Idea of the Week: Delta Air Lines, Inc. (DAL)

DAL looks poised to continue gliding higher

by 2/21/2014 10:55:47 AM
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Atlanta-based carrier Delta Air Lines, Inc. (NYSE:DAL) has been a high flier of late, appreciating more than 130% during the last year to sharply outperform both the S&P 500 Index (SPX) and the PowerShares Aerospace & Defense (ETF) (NYSEARCA:PPA). From a shorter-term perspective, the stock has outperformed the SPX -- on a relative-strength basis -- by 10 percentage points over the last two months.

The equity's strong price action lifted it to a new all-time high of $32.92 late last month. Since then, the shares have consolidated to test support at their 40-day moving average -- a trendline that has served as a floor on a number of occasions during the last year. Data from Schaeffer's Senior Quantitative Analyst Rocky White reveals this is a bullish technical sign. In fact, looking out 21 trading days past the retest of the 40-day, DAL has been higher 86% of the time, for an average three-week return of 7.7%. As such, now looks like an opportune time to consider a long play.

Daily Chart of DAL Since September 2012 With 40-Day Moving Average

Off the charts, Delta recently reported fourth-quarter earnings and sales that exceeded analysts' expectations. Passenger traffic increased during the holiday season, while total fuel spending decreased. Looking forward, the carrier projected an operating margin of up to 8% for the current quarter.

On the sentiment front, however, DAL options players have been steadily growing more skeptical in recent sessions. The stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio has risen from 0.14 two weeks ago to 0.23 currently, suggesting an increase in the relative amount of puts being purchased to open. If DAL continues to surge off of trendline support, some of these new bears may unwind their positions, providing a contrarian tailwind.

Analysts, meanwhile, are maintaining a degree of cautious optimism. The consensus 12-month price target of $39.53 is roughly 24% above the stock's current price of $31.87. While this allows for a healthy margin of upside, these targets may require adjustment down the road, should DAL continue its sharp upward trajectory.

Bullishly minded speculators interested in purchasing Delta Air Lines, Inc. (NYSE:DAL) options could consider the in-the-money June 27-strike call, currently asked at $5.90. It is worth noting that Schaeffer's Volatility Scorecard (SVS) for DAL ranks in the 92nd annual percentile. An elevated SVS reading indicates that Delta shares have tended to make outsized moves over the past year, relative to what the options market has priced in.

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