Options Bears Won Big as American Airlines Stock Crashed

Bearish brokerage notes put pressure on the airline stock

Jul 12, 2018 at 3:25 PM
facebook X logo linkedin


Subscribers to Schaeffer's Players service recently banked a big profit with American Airlines Group Inc (NASDAQ:AAL) July 44 put. We're going to take a look back to see why we were initially bearish on AAL when we recommended the put, and how the successful options trade unfolded.

At the time of our put recommendation on Tuesday, June, 12, AAL stock was severely underperforming the broader equities market -- down 16% year-to-date. Plus, the shares were facing resistance from their declining 40-day moving average, and appeared ready to break down from a bear flag pattern.

In spite of these technical troubles, there was plenty of optimism being priced into AAL shares. For starters, the security's top-heavy 10-day call/put volume ratio of 8.33 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) was ranked in the 100th annual percentile, meaning calls had been bought to open over puts at an extreme clip.

What's more, American Airlines' gamma-weighed Schaeffer's put/call open interest ratio (SOIR) was docked at 0.27 -- meaning near-the-money calls nearly quadrupled puts among options set to expire in the front three-months' series of options. Such a heavy accumulation of call open interest can often create headwinds for a stock, as the hedges related to these bets are unwound.

Meanwhile, 11 of 15 analysts maintained a "buy" or better rating on AAL. This left the door open for a round of bearish brokerage notes, which could weigh on the shares.

The stock seemed like a prime candidate for a premium-buying strategy, too. This was evidenced by its elevated Schaeffer's Volatility Scorecard (SVS) of 70 out of a possible 100, indicating AAL stock had tended to make outsized moves, relative to what the options market had priced in.

Shortly after our recommendation, American Airlines shares began to retreat from their 40-day moving average, pulling back alongside the broader equities market. The stock strung a seven-day losing streak together in late June, prompting us to close half our position on June 25.

Analysts soon began reacting to this extended slump. While Raymond James cut its AAL price target back on June 20, Deutsche Bank downgraded the airline stock to "hold" from "buy" on July 3, citing risk associated with a potential U.S.-China trade war. The shares closed 1.6% lower that day, and on July 9, we closed the remainder of when the equity was trading at $38.80 to lock in a 132% profit.

american airlines stock chart july 12

 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI