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Southwest Airlines Co. (NYSE:LUV - 11.64) rallied to a new annual peak of $11.73 last Friday, and optimistic option players placed bets the stock will continue to trek higher in the near term. The majority of the day's call volume centered on LUV's March 12 call, which saw 11,716 contracts change hands. Nearly all of these crossed at the ask price, implied volatility rose 5.4 percentage points, and open interest added 10,731 positions over the weekend, pointing to the initiation of new bullish positions.
By buying these out-of-the-money calls to open for a volume-weighted average price (VWAP) of $0.21, traders will profit with each step north of $12.21 (strike price plus VWAP) LUV takes through the close on Friday, March 15, at which point back-month contracts will expire. At last Friday's close, delta for this call was docked at 36%, indicating a more than 1-in-3 chance this option will finish in the money by expiration. Should the stock fail to make the 5% move to the upside by expiration, the most these call buyers have risked is the initial premium paid.
As my colleague Terri Stridsberg mentioned last Thursday, calls have been in high demand on LUV, and traders have continued to up the bullish ante. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 9,516 calls have been bought to open throughout the past 10 sessions, compared to just 201 puts. The resultant call/put volume ratio of 47.34 ranks higher than all other readings taken in the past year, indicating bullish bets have been placed over bearish at an annual high clip in recent weeks.
Echoing this is the stock's declining Schaeffer's put/call open interest ratio (SOIR). Since Jan. 22, LUV's SOIR has dropped to 0.33 from 0.88, as near-term call open interest climbed 249%. This ratio is currently ranked in the 10th percentile of its annual range, implying short-term speculators have rarely been more call-heavy toward LUV.
On the charts, the stock has experienced a solid bout of positive price action in recent months. In addition to outperforming the broader S&P 500 Index (SPX) by 16.7 percentage points during the past 60 sessions, the equity has bounced nearly 34% from its mid-November low of $8.70.