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Is Delta Air Lines, Inc. (DAL) Headed for New Highs?

DAL call buyers are targeting a new annual high

by 4/29/2013 2:52 PM
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Bullish bets are ramping up in Delta Air Lines, Inc. (NYSE:DAL) shares, with some speculators hoping to see the stock reach another new multi-year high during the next few weeks. Today, with the shares trading 0.7% higher at $16.93, roughly 26,000 Delta calls have changed hands, more than tripling the average daily call volume. In contrast, just 1,200 put options have crossed the tape so far today.

Garnering the most attention is the May 18 call, where nearly 17,500 contracts have traded, versus open interest of 5,160. The lion's share of the volume has gone off at the ask price, and implied volatility is up 6.2 percentage points today, suggesting these calls are being purchased to open. While one block of 7,463 contracts changed hands at the ask price of $0.29 per contract during the lunch hour, the volume-weighted average price across today's trades is $0.26.

This bullish bet calls for Delta Air Lines shares to stretch above the 18 strike by May 17, when these options expire. Specifically, the breakeven price at expiration is $18.26 (strike price plus VWAP). Breakeven is 5.9% above the stock's five-year peak of $17.25 (reached on March 21), as well as 7.9% north of the stock's current perch.

While not every option player is as hopeful as today's short-term call buyers, there has been a recent trend toward the bullish side of the fence. In the last 10 trading days, more than 29,000 calls have been purchased to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), compared to roughly 5,000 puts. The resultant call/put volume ratio of 5.81 is in the 60th annual percentile, suggesting that long calls are only slightly more popular now than average. In other words, the bullish bandwagon isn't yet crowded, relatively speaking.

DAL has exhibited strong price action of late, rising more than 42% in 2013 and outperforming the S&P 500 Index (SPX) by nearly 15 percentage points during the last three months. Since mid-December, also, the stock has been guided higher by its 10-week and 20-week moving averages.

Whether the stock can rally nearly 8% to tag a new multi-year high within the next three weeks, however, remains to be seen. Delta on the May 18 call stands at 0.29, with the options market pricing in a 29% chance for an in-the-money finish. Still, if DAL is still trading below the strike price when the options expire, the call buyers lose only 100% of the premium paid, or an average of $26 per contract.


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