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Delta Air Lines Speculators Anticipate a Post-Earnings Descent

DAL investors are honing in on long-term options ahead of earnings

by 10/23/2012 1:25 PM
Stocks quoted in this article:

Long-term option traders are targeting Delta Air Lines, Inc. (NYSE:DAL - 9.97) today, employing both puts and calls to place neutral-to-bearish bets on the airline issue. In early afternoon trading, DAL has seen around 16,000 calls and 10,000 puts change hands, far exceeding its typical mid-session volume of fewer than 4,200 calls and 2,300 puts.

On one hand, the stock's out-of-the-money March 11 call has seen nearly 10,900 contracts traded -- mostly at the bid price, suggesting they were sold. Considering implied volatility (IV) was last seen higher, as well as the calls' out-of-the-money status, there's a good chance the investors are selling the calls to open. By doing so, the sellers are expecting DAL to remain south of $11 through the next several months. In this best-case scenario, the calls will expire worthless, allowing the traders to retain the entire net credit received at initiation.

On the other hand, more "vanilla" option bulls have honed in on DAL's out-of-the-money January 2014 7-strike puts, of which 9,000 have traded. Ninety-one percent of the puts crossed at the ask price, and IV is on the rise, hinting at buy-to-open activity.

By purchasing the LEAPS to open, the buyers have one of two motives: to profit from a significant pullback over the long term, or to protect a long stock position. The volume-weighted average price (VWAP) of the puts is $0.81, meaning the bears will profit if DAL sinks below the $6.19 level (strike minus premium paid) -- a 38% decline from current levels, and in territory DAL hasn't charted since mid-2009. Meanwhile, the protective put buyers have locked in a sale price of $7, should DAL fall to multi-year lows within the next year.

Expanding our sentiment scope, today's seemingly bearish betting marks a change of pace in the options arena. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than 17 DAL calls for every put during the past two weeks. In fact, the equity's 10-day call/put volume ratio of 17.41 stands just 15 percentage points from an annual high, implying that options speculators have scooped up calls over puts at a quicker-than-usual step recently.

Elsewhere on Wall Street, the analyst crowd is also optimistic when it comes to DAL. Currently, the stock has earned eight "strong buys" and one "buy" endorsement, compared to two lukewarm "holds" and not one "sell" or worse rating. In addition, the average 12-month price target on the stock stands at a lofty $15.32 -- representing a premium of 51% to DAL's closing price of $10.14 on Monday, and in record-high territory for the shares.

On the charts, DAL has tacked on about 8.8% so far in October. However, the security is struggling to maintain a perch in double-digit territory, and is facing pressure from its 10-month moving average.

Fundamentally, the company has fallen short of analysts' bottom-line earnings estimates in two of the past four quarters, according to Thomson Reuters. Ahead of tomorrow morning's earnings release, Wall Street is calling for a third-quarter profit of 91 cents per share. Should the firm once again miss the mark, an unwinding of optimism in the options pits, or a flood of downbeat analyst attention, could translate into contrarian headwinds for DAL.


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