Why We're Trading Delta Airlines (DAL) Put Options This Week

DAL's recent peak just shy of its all-time high is one of several troubling technical developments for the airline stock

Jan 19, 2017 at 2:01 PM
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Over the past month, Delta Air Lines (DAL) shareholders have experienced a "fake all-time high" (12/9/16), followed by a "fake earnings beat" (1/12/17). OK -- maybe not "fake," per se, but the fact is that DAL's high on Dec. 9 did fall a penny shy of the all-time high of a year prior. And rarely have we seen earnings reports "pre-hyped" to an extent rivaling DAL's release on Thursday -- as breathless analysts and financial news reporters awaited DAL revenue and profit metrics that would somehow (miraculously) be consistent with the company's most recent "upside guidance," and yet at the same time exceed these already boosted expectations.

Sure enough, DAL shares have gone nowhere since Thursday morning's earnings release. But, then again, the same can be said about DAL shares over the past year, and over the past two years. In fact, per the accompanying chart, DAL has closed out each of the past three years at prices within 1.5 points of each other. And the period since late 2014 has been characterized by repeated failed rallies by DAL to the $50-$52 area -- and repeated sharp pullbacks in the wake of those failures.

But there is also a seasonality component to these price failures, with the "peak followed by a sharp decline" syndrome most likely to manifest itself in December and January.

Based on the aforementioned markers of price behavior by DAL shares (plus the near-unanimous chorus of bullish analysts, who seem destined to begin expressing rumblings of disappointment in the weeks ahead), we see the next tradeable move by DAL as being to the downside.

Our recommended DAL put option carries a very attractive leverage ratio of 10.9-to-1, and based on Friday's closing prices, it can achieve our targeted profit of 100% on a pullback by DAL over the holding period of less than 10% from its 2017 peak.

dal weekly sm 0113

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