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
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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


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