3 Stocks That Could Swing on Earnings Tomorrow

AAL options traders are betting on a rare post-earnings win

Apr 25, 2018 at 1:09 PM
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It's the thick of earnings season, and while blue chips have been dominating the action recently, airlines are on deck. Looking ahead to tomorrow's calendar, specifically, American Airlines Group Inc (NASDAQ:AAL), Spirit Airlines, Inc. (NYSE:SAVE), and Southwest Airlines Co (NYSE:LUV) are all slated to report first-quarter earnings ahead of the opening bell.

American Airlines Options Volume Pops Before Earnings

Over the last eight quarters, American Airlines stock has closed lower in the session after the company reports six times -- including the two most recent. On average, the shares have swung 3.7% in the past two years, regardless of direction. This time around, the options market is pricing in a bigger next-day move of 7.5%.

AAL call volume is popping ahead of the event, with more than 26,000 contracts on the tape -- two times what's typically seen at this point in the session. Among the most active is the weekly 4/27 45-strike call, where it looks like some traders may be buying to open the contracts for a volume-weighted average price (VWAP) of $1.19. If this is the case, breakeven at this Friday's close -- when the series expires -- is $46.19 (strike plus VWAP).

American Airlines shares closed north of here last week, but have plunged 3% since then to trade at $45.39. This negative price action is just more of the same for AAL, which is down 21% from its mid-March peak. However, the selling appears to be stalling out in the $44 region, which helped contain a third-quarter pullback last year.

Short Sellers Abandon Spirit Airlines Ahead of Earnings

Spirit Airlines has a history of negative earnings reactions, falling as much as 18% the session following the company's report last July. In the two most recent quarters, though, SAVE has posted a next-day gain. For tomorrow's trading, the options market is pricing in a move of 7.9% in either direction, larger than the average swing of 4.4% over the past eight quarters.

Looking closer at the charts shows a disappointing technical performance. SAVE has been stuck churning below its 320-day moving average since a late-July bear gap, with the equity's 200-day trendline serving as a more immediate ceiling in recent weeks. Spirit Airlines stock was trading 3% lower at $37.11, at last check.

Plus, the shares have been unable to capitalize on a steady stream of buying power over the long term. Short interest is down 31.3% since the Dec. 1 peak at 10.72 million shares -- a time frame in which SAVE shares are down 12.8%. The stock remains heavily shorted, though, with the 7.36 million shares dedicated to these bearish bets accounting for 10.7% of the equity's available float.

Bullish Options Premium Cheap as Southwest Airlines Struggles

Southwest Airlines has dropped in the session after the airline unveiled earnings in six of the past eight quarters, including the four most recent quarters. The options market is pricing in a 7% move this time around, more than the 5.5% swing the stock has averaged over the last two years, in either direction.

Based on the stock's current perch at $53.17 -- down 1.3% so far today -- another post-earnings move lower would have LUV trading below $49.25 for the first time since January 2017. Longer term, the shares have been trending lower since their late-December record high of $66.99, and are currently pacing for their lowest close since Nov. 13.

Against this backdrop, LUV call options are currently pricing in remarkably low volatility expectations relative to their put counterparts. The stock's 30-day at-the-money implied volatility of 32.7% is ranked in the 93rd annual percentile.


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