Bears Bash Southwest Airlines Co (LUV) After Grim Outlook

Bears are betting on extended losses for Southwest Airlines Co (NYSE:LUV), after the firm presented a disappointing outlook

by Josh Selway

Published on Dec 8, 2015 at 2:58 PM
Updated on Jun 24, 2020 at 10:16 AM

Southwest Airlines Co (NYSE:LUV) is taking it on the chin today, falling 8.4% to $45.35, after the low-cost airliner announced a disappointing fourth-quarter outlook. The development is overshadowing gaudy November traffic numbers, while also impacting a sector rival. As such, LUV has found a spot on the short-sale restricted list, forcing pessimistic traders to the options pits to place their bets. 

The stock's put volume is running at 11 times the normal afternoon pace. Moreover, today's put volume lands in the 99th percentile of its annual range. Leading the way is the January 2016 45 strike, and data suggests buy-to-open activity. This means traders are betting on the stock to extend its slide below $45 before January expiration. 

Even before LUV's downfall today, put buying had been popular at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Across these exchanges, traders have bought to open 1.46 puts for every call over the past 10 days. The resultant put/call volume ratio of 1.46 stands higher than all but 2% of readings taken in the past year. In short, put buying has been much more popular than normal in recent sessions. Of course, given LUV's technical prowess (today notwithstanding), it's possible some of these put buyers were shareholders hedging against a surprise patch of turbulence.

Short-term speculators have a couple things potentially working for them, no matter their motives. For one, LUV's Schaeffer's Volatility Index (SVI) of 32% is lower than almost two-thirds of all other readings from the past year. This tells us that premiums are relatively muted on the stock's near-term options, from a historical perspective. Furthermore, the equity's Schaeffer's Volatility Scorecard (SVS) comes in at 75, meaning the shares have tended to make outsized moved during the past year, compared to what the options market has priced in. 

Separately, it's worth noting that LUV was in overbought territory heading into today. This is evidenced by its 14-day Relative Strength Index (RSI) of 74. In other words, a pullback may have been in the cards.

As alluded to, Southwest Airlines Co (NYSE:LUV) has generally been dominant in 2015. In fact, the shares remain over 19% higher since the start of the quarter, and hit a record high of $51.34 just yesterday. Separately, UBS remains upbeat on LUV's prospects despite the intraday turbulence, bumping its price target to $55 from $53 earlier this afternoon.

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