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Option Brief: United Continental Holdings Inc (NYSE:UAL) is one of the best-performing stocks on the Big Board this morning, up 3.8% at $41.90 ahead of what analysts expect to be the heaviest-traveled Memorial Day since the recession. What's more, options traders are wagering on even more upside for UAL, with intraday call volume running at nearly twice the average pace.
So far, close to 7,900 UAL calls have traded, compared to about 1,600 puts. Speculators are taking a shine to short-term options, as the stock's 30-day at-the-money implied volatility (IV) has popped 4.2% to 38.1%.
Digging deeper, a significant amount of the action has transpired at the now in-the-money June 41 call, where roughly 3,250 contracts have changed hands. Over two-thirds of the calls crossed on the ask side, IV is up 1.7 percentage points, and volume has outstripped open interest at the newly front-month strike -- all signs of buy-to-open activity.
The calls have traded at a volume-weighted average price (VWAP) of $2.20, meaning the buyers will reap a reward if UAL is sitting north of $43.20 (strike plus VWAP) by the close on Friday, June 20, when the options expire. In fact, the higher UAL surges north of breakeven within the option's lifetime, the more the buyers stand to gain, meaning profit potential is theoretically unlimited.
On the flip side, risk is capped at the initial premium paid for the calls, should UAL backpedal beneath the strike. In light of the stock's surge today, delta on the call has jumped to 0.59 from 0.47 at yesterday's close, implying a roughly 59% chance of an in-the-money finish. Even if UAL retreats, though, now is an opportune time for short-term premium buyers to jump in, as the stock's Schaeffer's Volatility Index (SVI) of 37% stands higher than just 30% of all other readings from the past year. In simpler terms, UAL's front-month options are attractively priced right now, from a volatility standpoint.
On the charts, United Continental Holdings Inc (NYSE:UAL) has advanced more than 10.8% so far in 2014, and boasts a month-to-date gain of 2.5%. After tagging a six-year high of $49.20 earlier this year, the security has consolidated atop its 10-month moving average, which acted as a springboard in mid-2013. Off the charts, traders are digesting a proposed set of rules by the Transportation Department, which would require airlines to do away with ambiguous fees.