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Southwest Airlines (LUV) Front-Month Calls Fly Off the Shelves

Speculators predict extended near-term gains for LUV

by 2/7/2013 1:33 PM
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Bullish traders are swarming Southwest Airlines Co. (NYSE:LUV - 11.52) today, after the company released a traffic update for January. Although overall traffic declined by 1.7% on a year-over-year basis, capacity inched 0.5% higher last month. As such, close to 4,100 calls have been exchanged so far, which is nearly eight times the equity's expected intraday call volume. Meanwhile, just over 700 puts have traded.

Leading the pack is the February 12 call, where 3,750 contracts have changed hands at a volume-weighted average price (VWAP) of $0.05. Nearly all of these calls crossed at the ask price, pointing to buyer-driven activity. Because this option presently holds open interest of just 1,304 contracts -- and implied volatility was last seen 6.6 percentage points higher -- it can be assumed that new bullish positions are being implemented here. Essentially, these traders are counting on the stock to surmount the breakeven rail of $12.05 (strike price plus the VWAP) by the close on Feb. 15, when these front-month options expire. This denotes a 4.6% increase over current levels.

According to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), today's campaign for calls is hardly unusual for the discount airline. In fact, LUV's 10-day call/put volume ratio checks in at 32.82, confirming traders have bought to open almost 33 calls for every put during the last two weeks. This ratio ranks higher than all other readings collected within the past year, meaning speculators have been snapping up bullish options over bearish at an annual-high clip.

Although LUV reported a 49% drop in fourth-quarter earnings on Jan. 24, the shares are still up roughly 13% year-to-date. What's more, the stock has outperformed the broader S&P 500 Index (SPX) by close to 16 percentage points during the past three months. However, the delta for the February 12 call sits at 13, implying these contracts have a 13% chance of finishing in the money. Nevertheless, the most today's bulls have at risk is the initial premium paid for their optimistic bets.


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