Southwest Shares Brush Off RASM Woes, Bear Note

Options traders have preferred LUV long puts of late

Managing Editor
Mar 27, 2019 at 11:09 AM
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It's a busy news day for Southwest Airlines Co (NYSE:LUV), which became the first airline to cut its first-quarter revenue per available seat mile (RASM) forecast after the Boeing 737 MAX 8 planes were grounded following a pair of fatal crashes. Also, LUV reported an emergency landed of the aircraft yesterday, though no passengers were on board. And later today, the Federal Aviation Administration (FAA) will testify in front of a Senate subcommittee over the 737 MAX 8.

At last check, LUV is up 2.6% at $50.01, even after receiving a price-target cut at Cowen and Company to $55 from $58. Coming into today, a majority of analysts supported the airliner, with 61% of covering firms sporting "buy" or better recommendations. Plus, the stock's average 12-month price target of $61.44 represents expected upside of 23% to current levels.

Digging deeper, LUV puts have been a popular pick for options traders, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), where the stock holds a 10-day put/call volume ratio of 1.42. This top-heavy ratio ranks in the 97th percentile of its annual range, meaning puts have been purchased over calls at a faster-than-usual clip of late.

Looking at its technical background, Southwest stock has shed nearly 22% since touching an annual peak of $64.02 in late September. The shares have struggled to fill a late-October bear gap, with a failed mid-January attempt putting LUV on its most recent leg lower. Year-to-date, the stock remains 7.2% above breakeven.


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