Call Buyers Fly to 2 Climbing Airline Stocks

Airline stocks are getting a boost today, following upbeat news from United Continental Holdings Inc (NYSE:UAL) this morning. Options traders have been responding enthusiastically, with call volume surging on sector peers American Airlines Group Inc (NASDAQ:AAL) and Southwest Airlines Co (NYSE:LUV).

AAL is up 1.1% at $30.04 today, paring its year-to-date losses to 29%, after hitting a new annual low of $28.85 just last Friday. Analysts have been mainly in the stock's bullish corner lately, with nine out of 12 rating AAL a "buy" or better. But short interest has been on the rise, up 16.4% over the past two reporting periods to represent nearly a week's worth of trading, at the equity's average daily volume.

Meanwhile, AAL calls have been hot for weeks. The stock's 50-day call/put volume ratio of 4.32 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 81% of the past year's readings. Meanwhile, its Schaeffer's put/call open interest ratio (SOIR) of 0.28 is an annual low, showing near-term traders haven't been more call-heavy toward the stock in the last 12 months.

Today appears to be an extension of the same, with AAL calls crossing at nearly twice their typical intraday pace and outnumbering puts roughly 6-to-1. Most active is the weekly 7/1 32-strike call, where ISE has confirmed new positions are being bought to open. Buyers of the call are betting American Airlines Group will rally above $32 by the close on Friday, July 1, when the weekly option expires.

LUV is 1.2% higher at $40.51, and up 16% over the past 12 months, though the shares recently gave up a key level of support. Two-thirds of brokerage firms rate the stock a "strong buy," without a "sell" on the books, but unlike AAL, LUV short sellers have been backing off. In fact, these bearish bets fell by 12.5% during the most recent two-week reporting period, and now account for just 1.5% of the stock's total float.

While LUV calls have been bought to open at more than twice the rate of puts over the past two weeks on an absolute basis, near-term traders have been extremely put-heavy. The stock's SOIR of 2.68 clocks in at an annual high, and shows put open interest nearly tripling call open interest across the front three-months' series of options. In fact, focusing in on near-the-money options in the July series, the trend is even more pronounced, as evidenced by LUV's front-month gamma-weighted SOIR of 4.39.

Calls are back on top today, trading at six times their average intraday rate, and outpacing puts more than 10-to-1. Most active by a mile is the weekly 7/1 41.50-strike call, where traders have been purchasing new positions, expecting Southwest Airlines Co to climb above $41.50 before the option expires. Interestingly, it appears most of the action on this weekly option occurred at roughly the same time as the largest trade on AAL's weekly 7/1 32-strike call.