Southwest Airlines Co (LUV) Options Traders Side With Cramer

Call buyers have set their sights on Southwest Airlines Co (NYSE:LUV) in recent weeks

by Karee Venema

Published on Jun 8, 2016 at 9:22 AM
Updated on Jun 24, 2020 at 10:16 AM

CNBC's Jim Cramer -- who also offered up optimistic words for Lululemon Athletica inc. (NASDAQ:LULU) -- said Tuesday that, "it is safe to say the worst is over" for airlines. Southwest Airlines Co (NYSE:LUV) options traders appear to have taken the same bullish stance in recent weeks. Specifically, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 7,285 call options on LUV stock in the past 20 sessions, compared to 1,547 put options.

Echoing this call-skewed backdrop is LUV's Schaeffer's put/call open interest ratio (SOIR) of 0.44. Not only does this show that call open interest more than doubles put open interest among options slated to expire in three months or less, but it ranks in the low 38th percentile of its annual range. In other words, short-term speculators are more call-heavy than usual toward LUV stock.

Drilling down, peak front-month call open interest of 5,890 contracts is found at LUV's June 45 strike. According to data from the major options exchanges, a healthy portion of this activity has been of the buy-to-open kind, meaning call buyers are betting on breakout above $45 by next Friday's close, when the monthly June series expires.

Now appears to be an opportune time to strike on LUV's near-term options, too. For starters, the stock's Schaeffer's Volatility Index (SVI) of 25% rests in just the 5th percentile of its annual range. Plus, LUV's 30-day at-the-money implied volatility settled at 24.8% on Tuesday -- a 52-week low. Summing it all up, premium on the equity's short-term options is pricing in extremely low volatility expectations at the moment.

Technically, the shares are up roughly 16% year-over-year. More recently, though, Southwest Airlines Co (NYSE:LUV) has been struggling in the $43-$43.50 range -- a level that served as support in March and April -- and closed last night at $43.07. Today, the stock is up 0.7% in electronic trading, following a report showing the airline's May load factor increased to 85.8% in May.

LUV daily chart

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