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Option Idea of the Week: Southwest Airlines Co. (LUV)

Why pessimism on the Street could propel LUV even higher

by 12/13/2013 10:24:42 AM
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Southwest Airlines Co. (NYSE:LUV) has been soaring on the charts, up roughly 81% year-to-date, and outpacing the broader S&P 500 Index (SPX) by about 22 percentage points during the latest three-month time frame. Meanwhile, the security's recent pullback -- which occurred after LUV touched a decade high of $18.98 in late November -- was cushioned by its 32-day moving average, which has acted as a floor since early September. Nevertheless, there is still plenty of pessimism levied against the airline concern, which could add more fuel to its technical tank over the next few months.

Daily Chart of LUV since August 2013 With 32-Day Moving Average

Exploring LUV's sentiment backdrop reveals a bearish bias among traders lately. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day put/call volume ratio of 0.41 ranks in the 74th annual percentile, conveying speculators have been picking up puts relative to calls at an accelerated clip during the last 10 weeks.

Similarly, LUV's Schaeffer's put/call open interest ratio (SOIR) of 0.68 registers higher than 71% of comparable readings collected within the past year. Or, in simpler terms, near-term traders are more put-focused toward the security than usual right now. This host of put open interest, especially at underfoot strikes in the December and January series, could end up translating into options-related support down the road.

Also of note, although seven covering analysts have handed out "strong buy" ratings, the remaining five maintain "hold" or worse recommendations for the equity. What's more, LUV's consensus 12-month price target of $19.12 reflects a premium of just 3% to the stock's present perch at $18.56. In other words, a round of upgrades and/or price-target hikes could be in the cards for the security, which could give it an additional boost. (In fact, the shares tacked on 4.6% during yesterday's session, after LUV was raised to "buy" from "neutral" at BofA-Merrill Lynch.)

Traders hoping to bet on continued upward momentum for Southwest Airlines Co. (NYSE:LUV) might want to think about purchasing the equity's in-the-money March 2014 16-strike calls, which sport an ask price of $2.75 right now.

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