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Can Delta Air Lines Muscle Back Into Double-Digit Territory?

DAL has seen a relatively rare spike in call volume

by 8/29/2012 12:54 PM
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The shares of Delta Air Lines, Inc. (NYSE:DAL - 8.52) have spent most of the session in the red, extending their month-to-date loss to more than 11.5%. However, options players are showing a relatively rare affinity for bullish bets today, as evidenced by a surge in call volume.

In early afternoon trading, the airline issue has already seen roughly 28,000 calls cross the tape -- about 12 times the norm. Meanwhile, fewer than 6,500 DAL puts have been exchanged. Garnering the most attention has been the out-of-the-money January 2013 10-strike call, which has seen more than 10,000 contracts traded on open interest of fewer than 6,400, pointing to newly opened positions. Ninety-eight percent of the LEAPS have crossed at the ask price, hinting at buyer-driven volume.

By purchasing the calls to open, the buyers are expecting DAL to muscle back into double-digit territory within the next several months. More specifically, the volume-weighted average price of the calls was $0.55, meaning the buyers will begin to profit if DAL topples the $10.55 level (strike plus premium paid) within the options' lifetime.

As alluded to earlier, though, today's appetite for optimistic positions runs counter to the recent trend on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where DAL sports a 10-day put/call volume ratio of 1.89. In other words, options traders have bought to open nearly twice as many DAL puts as calls during the past two weeks. What's more, this ratio sits just two percentage points shy of a 52-week acme, implying that speculators have rarely initiated bearish bets over bullish at a faster pace during the past year.

In the same vein, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.81 stands higher than 74% of all others of the past 12 months. Or, simply put, DAL's short-term options crowd is more put-heavy than usual at the moment.

However, not everyone on Wall Street is pessimistically positioned. Currently, DAL boasts eight "strong buys" and one "buy" rating from analysts, compared to two lukewarm "holds" and not a single "sell" or worse recommendation. In similar fashion, the average 12-month price target sits at a lofty $16.42 -- nearly double DAL's current price.

On the charts, the shares of DAL have stair-stepped lower since peaking north of $12 in late May, with recent rebound attempts halted by their 10-day and 200-day moving averages. Should the stock continue to struggle on or off the charts, a round of downgrades and/or price-target cuts could exacerbate selling pressure on the shares.

Daily Chart of DAL since May 2012 With 10-Day and 200-Day Moving Averages


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