Pre-Earnings Options Traders Get Defensive on United Stock

United Continental Holdings Inc will remain in the spotlight next week when it reports earnings Monday evening

by Karee Venema |

Published on Apr 13, 2017 at 11:46 AM
Updated on Apr 13, 2017 at 1:18 PM

It's been a rough week for United Continental Holdings Inc (NYSE:UAL), after a video showing a United Airlines passenger being forcibly removed from an overbooked plane went viral. While talk of a lawsuit swirls, the company will be in the spotlight for another reason, too, with UAL due to report first-quarter earnings after Monday's close. Ahead of the event, United Airlines stock is trading at $69.93 -- down roughly 1.3% on the week -- and options traders have been taking a defensive stance toward the shares in recent sessions.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, UAL options traders have bought to open 15,249 puts in the past 10 days, compared to 12,371 calls. The resultant put/call volume ratio of 1.23 ranks in the 81st annual percentile, meaning long puts have been initiated relative to calls at a faster -than-usual clip.

Echoing this is UAL's Schaeffer's put/call open interest ratio (SOIR) of 1.02, which ranks just 3 percentage points from a 52-week peak. In other words, speculative players are more put-heavy than usual among options set to expire in three months or less.

In the front-month series -- which expires at next Friday's close -- peak put open interest of 4,357 contracts is found at the April 65 strike, though it's unclear whether these positions were bought or sold at initiation. Meanwhile, a number of put buyers have targeted UAL's May 67.50 strike in the past two weeks, betting on the stock to retreat below $67.50 by May options expiration.

However, UAL's weekly 4/28 72.50- and 77.50-strike calls have seen the biggest increases in open interest in the last 10 trading days, and based on data from the major exchanges, it looks like one trader may have initiated a short call spread with the weekly options. If this is the case, the options trader expects UAL stock to stay below $72.50 over the next two weeks.

Regardless, it's getting pretty pricey to speculate bearishly on UAL shares, per the stock's 30-day implied volatility skew of 16.7%, higher than 97% of all comparable readings taken in the past year. Plus, this reading topped out at an annual peak of 38.2% yesterday. Simply stated, puts are more expensive now, relative to calls, than almost any other time during the past year.

Historically speaking, United Airlines stock has gained ground in the session subsequent to reporting five times in the past eight quarters. On average, and regardless of direction, United Continental Holdings Inc (NYSE:UAL) has moved 2.3% the day after reporting. This time around, the options market is pricing in a somewhat similarly sized move of 2.6%.

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