Airline Swoon Fuels Manic Option Trading on LUV, AAL, DAL

Option traders are taking aim at sinking Southwest Airlines Co (LUV), American Airlines Group Inc (AAL), and Delta Air Lines, Inc. (DAL)

May 20, 2015 at 10:59 AM
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Airline stocks are getting murdered this morning, after Southwest Airlines Co (NYSE:LUV) warned of a drop in current-quarter passenger unit revenue. Against this backdrop, option traders are blitzing LUV, as well as sector peers American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL). 

LUV was last seen 7% lower at $38.05, and the stock's 30-day at-the-money (ATM) implied volatility (IV) has popped 21.1% to 32.6% -- above two-thirds of all other readings from the past year. LUV puts are flying off the shelves at 29 times the average intraday clip, with buy-to-open action spotted at the July 37 strike -- most active by a mile. By purchasing the puts to open, the buyers expect LUV to breach $37 by the close on Friday, July 17, when the options expire.

Today's affinity for Southwest Airlines Co puts is nothing new, though. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 0.77 stands higher than 94% of all other readings from the past year. 

Things aren't any better for AAL, which has surrendered 7.1% to sit at $44.52. The equity's 30-day ATM IV has jumped 15.5% to 38.6%, though calls are the options of choice. Roughly 105,000 AAL calls have changed hands -- six times the norm, and three times the number of puts. It looks like bullish holdouts are buying to open the June 45 call, gambling on a rebound north of $45 by the close on Friday, June 19, when front-month options cease trading. 

Again, though, the appetite for American Airlines Group Inc calls is just more of the same. On the ISE, CBOE, and PHLX, the equity's 10-day call/put volume ratio of 4.53 ranks in the 87th percentile of its annual range. Echoing that bullish bias, AAL sports 10 "buy" or better ratings, compared to three "holds" and not a single "sell." 

DAL has surrendered 4.8% to linger just south of $44, and the stock's 30-day ATM IV has surged 14.2% to 33.1%. Puts are crossing the tape at 11 times the average intraday clip, though calls account for the top four most active options. Specifically, it looks like traders are buying to open weekly 5/29 44.50- and 46.50-strike calls, which will move into the money if DAL topples the strikes by next Friday's close, when the options expire. 

On the ISE, CBOE, and PHLX, the security's 10-day call/put volume ratio of 6.36 ranks in the 96th percentile of its annual range. Echoing that, Delta Air Lines, Inc.'s Schaeffer's put/call open interest ratio (SOIR) of 0.38 sits higher than just 12% of all other readings from the past year, suggesting short-term traders are more call-heavy than usual. However, considering short interest surged nearly 31% during the past two reporting periods, it's possible that some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to hedging.


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