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Option Bull Looks for JetBlue Airways Corporation (JBLU) to Fly

JetBlue Airways Corporation options volume swells, powered by a bullish risk reversal

by 4/16/2014 3:04 PM
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Option Brief: JetBlue Airways Corporation (NASDAQ:JBLU) options are trading at breakneck speed this afternoon. More than 7,500 calls and 5,500 puts are on the tape -- roughly six and 23 times their respective intraday averages.

Attracting our attention is a bullish risk reversal, which Trade-Alert highlighted this morning. Specifically, a block of 5,000 May 8 puts traded at the bid price of $0.15 each, and within seconds, a matching lot of May 9 calls crossed the tape at the ask price of $0.25 apiece. Volume at both strikes outstrips open interest, and implied volatility is trending higher. This suggests a spread trader is making a bullish bet on JBLU by selling to open the puts, and simultaneously buying to open the calls.

Under the terms stated above, the trader expects JBLU to fly higher during the next four-plus weeks, and finish above the 9 strike by the close on Friday, May 16, when the soon-to-be front-month options expire. Gains will begin to accumulate past the breakeven point of $9.10 (call strike plus the net debit paid).

By contrast, the option bull is hoping JetBlue shares don't dip below $8, which would put him at risk of assignment -- with a maximum potential loss of $8.10 (short strike plus net debit), should the stock reach zero. Alternatively, both options could be rendered worthless if the shares are resting between $8 and $9 at expiration, in which case the trader would simply part with the $0.10 net debit he paid for each pair of contracts.

The equity is headed in the right direction so far, up 4.3% to $8.67 on an upgrade to "buy" from "hold" at Argus. Also important -- next Thursday morning is JetBlue Airways Corporation's (NASDAQ:JBLU) scheduled earnings date. The Street is projecting first-quarter earnings of 9 cents per share from the airline, or 4 cents higher than a year ago.


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