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BofA-Merrill Lynch slapped JetBlue Airways Corporation (NASDAQ:JBLU) with a downgrade to "underperform" from "neutral" this morning, citing overly lofty expectations for a management change at the airline issue. As such, shares of JBLU are down 8% this afternoon, while option volume has soared to three times the average intraday pace. Against this accelerated demand, the stock's 30-day at-the-money implied volatility (IV) has jumped 10.9% to 36.9% -- in the 79th percentile of its annual range.
Most active is JBLU's December 14 call, where 5,620 contracts have crossed the tape thus far. However, the majority of these changed hands at the bid price, signaling seller-driven volume. IV is trending higher, and volume outstrips open interest, hinting at the initiation of new positions.
By selling the calls to open, traders are banking on JBLU staying south of $14 through the close on Friday, Dec. 19, when the options expire. In this best-case scenario, the calls will expire worthless, and the speculators can retain the initial credit collected as their full potential reward. Should the security rally north of the strike -- which is located 24.6% above the equity's current perch at $11.24 -- the traders could risk assignment, and face theoretically unlimited losses.
Heading into today's trading, JetBlue Airways Corporation (NASDAQ:JBLU) was enjoying a nearly 43% lead on the year. However, the $14 area capped the equity's advances in late 2006-early 2007, and the shares have not toppled this mark since. The options market isn't expecting this backdrop to change, with delta on the aforementioned call docked at 0.13, suggesting a slim 13% chance the option will be in the money at expiration.