2 Overbought Airline Stocks Dropping as Short Interest Pops

Delta Air Lines, Inc. (NYSE:DAL) and JetBlue Airways Corporation (NASDAQ:JBLU) have both been running higher lately, but Cuba concerns have the shares falling today

by Kirra Fedyszyn

Published on Nov 28, 2016 at 3:36 PM

The death of former Cuban president Fidel Castro has had some interesting effects on the market today, as has an early tweet from President-elect Donald Trump. Specifically, Trump said "If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal." Among the stocks moving in response are airline interests Delta Air Lines, Inc. (NYSE:DAL) and JetBlue Airways Corporation (NASDAQ:JBLU), which are both in the red this afternoon, with rising oil prices also lending pressure. Notably, both of these stocks have also seen significant increases in short interest during the most recent reporting period, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

DAL has shed 1% at $48.75 today, widening its year-to-date deficit to nearly 4%. The stock has spent much of this month flying up the charts, but its run was cut short in the $49 region, which has caused trouble for the shares numerous times over the past year. Notably, a breather for DAL may have been overdue, considering the stock's 14-day Relative Strength Index (RSI) of 85 was deep into overbought territory.

During two most recent reporting periods, short interest on DAL has shot up by more than 61%. Even so, just 2.2% of the equity's available float is currently shorted, meaning selling pressure could continue to pile on. A round of downbeat attention from the brokerage bunch could also weigh on the shares. After all, eight out of 11 analysts rate DAL a "buy" or better, without a single "sell" on the books.

Turning to the options pits, DAL calls have been popular of late, with more than two bought to open for each put over the last 10 days at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Over the same period, the December 49.50 and 50 calls were among the positions to see the largest increase in open interest, with data from the major exchanges confirming a large number of these positions were bought to open. That means traders have been hoping DAL could continue its rally through the front-month expiration, on Friday, Dec. 16.

Today, DAL puts are popping, flying across the tape at triple the expected volume for this point in the session. In fact, the intraday put/call volume ratio of 1.34 ranks just 2 percentage points from an annual high, while put volume is also running in the 98th annual percentile. Bears have making moves today, apparently purchasing new positions at the weekly 12/9 42-strike put and the weekly 12/2 48.50-strike put.

It’s an attractive time to pick up DAL's near-term options, too. According to the stock's Schaeffer's Volatility Index (SVI) of 28% -- in the low 6th percentile of its 12-month range -- short-term options are pricing in unusually low volatility expectations at the moment. Plus, the Schaeffer's Volatility Scorecard (SVS) of 77 suggests Delta Air Lines, Inc. (NYSE:DAL) shares have tended to make larger moves on the charts than the options market has priced in over the past year.

Meanwhile, JBLU is down 2.5% today at $20.54, as the company celebrates the launch of its 100th destination -- Havana, Cuba. The stock is off 17% year-over-year, and its most recent rally ran out of steam just north of $21, which roughly capped JBLU’s gains in March and April, as well. Adding to the concern for shareholders, the stock's 14-day RSI clocked in at an overbought 77 on Friday.

Despite a weak technical showing over the past 12 months, JBLU has been surrounded by optimism. Of nine analysts following the stock, six recommend buying the shares, and none recommend selling. Short interest on the security represents a modest 3.5% of its total float -- but these bearish bets are showing signs of life, climbing by nearly 33% during the most recent two-week reporting period.

In the options pits, an unwinding of bullish bets could spell trouble for JBLU stock. The equity's 50-day call/put volume ratio at the ISE, CBOE, and PHLX sits at a top-heavy 11.25 -- just 4 percentage points from an annual high. What's more, peak open interest among all of the stock's options resides at the December 20 call, followed by the December 21 call, which also saw the biggest rise in open interest over the past 10 sessions. Plus, the major exchanges confirm a majority of positions at both strike were bought to open, with call buyers betting on extended gains for the stock. Notably, these two strikes rank among the most popular JBLU options today, but it looks like traders are largely selling to close their positions.

Like DAL, JetBlue Airways Corporation (NASDAQ:JBLU) could be presenting an attractive options-buying opportunity right now. Premium on short-term options should be particularly well-priced from a historical volatility standpoint, consider the stock's SVI of 30% is sitting lower than 97% of all comparable readings from the past 12 months. Likewise, the stock's 30-day at-the-money implied volatility is in just the 12th annual percentile, at 32%.

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