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Relative to what we typically observe, trading volume in Southwest Airlines Co.'s (NYSE:LUV) options pits is soaring. This is particularly true on the call side, where over 5,700 contracts have changed hands so far -- a quantity that is roughly 11 times the daily average, or 18 times the number of puts traded.
Most of this activity can be traced to a single speculator, who appears to have picked up a 5,000-lot of March 13 calls earlier today. The trader bought the contracts at the ask price of $0.95. Meanwhile, open interest at the strike consists of fewer than 300 positions, and implied volatility gained 1.8 percentage points on the transaction. Considered together, these factors suggest the initiation of fresh bullish bets, and information from the International Securities Exchange (ISE) confirms the same.
In order for the block trader to profit, LUV shares must advance from their current price of $12.77, past $13.95 (strike plus premium paid), by options expiration next March. Right now, the market is giving the options about a 1-in-2 chance of finishing in the money, based on its delta of 0.49, or 49%. Yet, even if the stock peters out short of the strike price, the most the investor can lose is his initial net debit.
From a technical standpoint, Southwest Airlines Co. (NYSE:LUV) has been flying high for the past year, so it's no surprise to see a trader betting on additional upside. Specifically, the stock has gained 43% on a year-over-year basis, and has now consolidated into its ascending 40-week moving average. The stock has not closed south of this trendline (on a weekly basis) since late October.