Put Buyers Should Take Another Look at Delta Stock

Delta Air Lines has underperformed the broader stock market, and more losses could be ahead for the airline stock

Apr 11, 2017 at 4:55 PM
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Delta Air Lines, Inc. (NYSE:DAL) closed a choppy session up 0.7% at $45.29, as fellow airline stock United Continental Holdings Inc (NYSE:UAL) dropped amid a United Airlines public relations nightmare. Delta has dealt with its own PR-related headaches recently, after a severe storm in Atlanta, Georgia, last week resulted in days' worth of flight cancellations. Longer term, DAL has shed 13% since facing familiar resistance at $52 in early March, and is now staring up at its formerly supportive 160-day moving average. Nevertheless, expectations remain high toward the underperformer, meaning DAL could be ripe for a bearish stock play, according to Schaeffer's Senior Quantitative Analyst Rocky White.

Delta Options Traders Have Targeted Short-Term Calls

In the options pits, for instance, DAL's Schaeffer's put/call open interest ratio (SOIR) of 0.37 ranks below 64% of all comparable readings taken in the past year, meaning short-term traders are more call-heavy than usual. Even more signficant, the stock's gamma-weighted SOIR of 0.67 indicates near-the-money calls outweigh puts among options set to expire in three months or less. This could create options-related headwinds for DAL stock, as the hedges related to these bets unwind.

Short Sellers Have Been Covering Their Bearish Bets on Delta Stock

Elsewhere on Wall Street, short sellers have been in cover mode recently, with short interest down 44% in the two most recent reporting period. It would take shorts just one session to cover the remaining shorted shares, meaning there's little in the way of sideline cash to help fuel any future rally attempts. Plus, the stock could be at risk of additional losses, should bears begin to increase their short positions on DAL.

Delta at Risk of Bearish Backlash from Analysts

What's more, there's plenty of room for analysts to downwardly revise their ratings on DAL stock, which could translate into headwinds for the shares. Of the 11 brokerages covering the shares, all but one maintain a "buy" or better rating, with not a single "sell" recommendation to be found. Plus, the average 12-month price target of $60.71 stands at a 34% premium to DAL's current perch -- and sits in uncharted territory.

Near-Term Delta Options are Affordably Priced

Those wanting to bet on DAL stock's near-term trajectory with options are in luck, too. Delta Air Lines, Inc.'s (NYSE:DAL) Schaeffer's Volatility Index (SVI) of 32% ranks in the 23rd percentile of its annual range, meaning low volatility expectations are being priced into the stock's short-term options. Plus, DAL's Schaeffer's Volatility Scorecard (SVS) is docked at 70, suggesting the equity has tended to make outsized moves over the past year, relative to what the options market has priced in.
 

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