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Southwest Airlines Co (LUV) Bulls Disregard Sector-Wide Swoon

Southwest Airlines Co call volume has swelled to six times the intraday average

by 4/10/2014 2:44 PM
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Option Brief: Southwest Airlines Co (NYSE:LUV) is more than 3% lower this afternoon to linger near $23.38, amid a sector-wide swoon. This hasn't stopped call players from targeting the equity's options pits, with volume running at more than five times the average intraday pace. Nine of the 10 most active strikes expire in three months or less, and this accelerated demand for short-term options has sent LUV's 30-day at-the-money implied volatility (IV) 11.0% higher to 26.6%.

LUV's April 24 call has emerged as the most sought-after strike, and it appears a number of speculators are wagering on a quick bounce for the airline issue over the next five-plus sessions. Of the 6,432 contracts traded at this out-of-the-money strike, 94% have gone off at the ask price -- including one large block of 3,000. IV is 4.0 percentage points higher, and volume outstrips open interest, collectively pointing to buy-to-open activity. Although LUV opened the session north of the strike price, delta for the call is docked at 0.24, suggesting a roughly 1-in-4 chance the position will be in the money at next Thursday's close, which is when front-month options expire.

Should the equity fail to reclaim its perch atop the strike price, the most the speculators stand to lose is the initial premium paid. Per LUV's Schaeffer's Volatility Index (SVI) of 20%, which ranks lower than 91% of comparable readings taken in the past year, premium on the stock's front-month options is relatively affordable at the moment. What's more, the security's Schaeffer's Volatility Scorecard (SVS) reading of 100 suggests LUV tends to make outsized moves, compared to what the options market has priced in.

This bullish positioning among option traders isn't too surprising, considering the equity is up more than 24% year-to-date. Plus, Southwest Airlines Co (NYSE:LUV) tagged a record high of $24.45 on April 2 before pulling back -- and subsequently bouncing from -- its rising 40-day moving average. As touched upon, though, the stock is trading lower today after Imperial Capital downwardly revised its earnings estimate for sector peer American Airlines Group Inc (NASDAQ:AAL).


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