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Delta Air Lines (DAL) Bears Look To Cash in On Storm

Put traders look for DAL losses post- Nemo

by 2/8/2013 9:47 AM
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Perhaps looking to cash in on potential losses at Delta Air Lines, Inc. (NYSE:DAL - 14.86) from the impending blizzard Nemo, put buyers were out in force against the stock Thursday, nearly doubling the normal daily put volume. Specifically, the most popular option was the March 14 put, which saw nearly 6,400 contracts cross the tape.

Almost all of these contracts went off at the ask price, and volume far exceeded open interest Thursday, meaning that many of these puts were probably bought to open. In fact, most were included in a single trade of 4,685 contracts. This put had a volume-average weighted price (VWAP) of $0.30, meaning DAL shares need to fall to $13.70 (strike minus VWAP) by the close on March 15 for traders to break even -- nearly 8% off current trading levels. If not, all they would lose is the premium paid. As of Thursday, the delta on this trade was 26%, meaning the options market gives it less than a one-in-three chance of being in the money by expiration.

These trades are part of a growing bearish attitude in the option pits toward the Atlanta-based airline. According to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), DAL has a 10-day put/call volume ratio of 0.78, but more importantly, that ratio ranks in the 79th percentile of similar readings taken in the past 12 months. And the ISE/CBOE/PHLX 50-day put/call volume ratio of 0.52 is in the 75th percentile -- meaning traders have recently been showing a heightened preference for puts.

But the stock has been strong on the charts, climbing almost 25% so far this year, and roughly 33% year-over-year. In addition, DAL shares have rallied more than 76% since hitting its 12-month low of $8.42 on Sept. 4. All airlines have been cancelling hundreds of flights in and out of the Northeast for the coming weekend, however, in advance of the huge blizzard expected to hit the area. In addition, Delta could soon be facing a larger competitor as the proposed merger between AMR Corporation (AAMRQ), the parent of American Airlines, and US Airways Group, Inc. (NYSE:LCC) gets closer to completion.


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