Market Overview

How Large Option Traders Are Playing Airlines Right Now

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How Large Option Traders Are Playing Airlines Right Now

Airline stocks bounced back on Tuesday following reports that the pace of new U.S. coronavirus (COVID-19) cases is declining.

On Tuesday, large airline option trades were mixed in nature, suggesting investors are divided on whether or not the recent momentum in Delta Air Lines, Inc. (NYSE: DAL), American Airlines Group Inc (NASDAQ: AAL) and United Airlines Holdings Inc (NASDAQ: UAL) will continue.

The Trades

On Tuesday, Benzinga Pro subscribers received several option alerts related to unusually large trades of discount retail options:

  • At 11:29 a.m., a trader bought 2,500 Delta put options with a $20 strike price expiring on Jan. 15, 2021 at the ask price of $4.85. The trade represented a $1.21 million bearish bet.
  • At 11:33 a.m., a trader bought 820 American put options with a $10 strike price expiring in January 2022 above the ask price at $4.641. The trade represented a $380,562 bearish bet.
  • At 10:44 a.m., a trader bought 1,400 United call options with a $40 strike price expiring on Dec. 18 at the ask price of $4.35. The trade represented a $609,000 bullish bet.
  • At 10:05 a.m., a trader sold 1,574 United call options with a $35 strike price expiring on April 17 at the bid price of 78.1 cents. The trade represented a $122,929 bearish bet.

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Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large sizes of the largest airline option trades they could certainly represent institutional hedging.

Up In The Air

The airline stocks have been among the hardest hit during the COVID-19 market sell-off as travel restrictions and general fears over the spread of the virus has dropped all non-essential airline travel near zero. Airlines have been making adjustments to their cancellation and flight change fees and their loyalty programs to accommodate their customers during the travel shutdown.

At this point, there’s no clear picture of when travel restrictions will be lifted and when passengers will once again be willing to fly. Airlines are getting a $50 billion bailout from the U.S. government, but that money will come with strings attached.

See Also: Delta, United Extend Loyalty Memberships For Another Year As Coronavirus Pummels Airlines

“To say that we’re rescuing shareholders — you know these stock prices are taking a beating and I don’t think there’s any rescue that’s come through for these shareholders yet,” Sen. Dick Durbin told CNBC last week.

At least one large shareholder is trimming back his exposure to airlines. Berkshire Hathaway CEO Warren Buffett has reportedly been selling shares of Delta and Southwest Airlines Co (NYSE: LUV), according to the latest Berkshire filings.

 

 

Here’s a breakdown of the percentage of StockTwits messages mentioning each of the big four airline stocks that were bullish in nature on Tuesday:

  • Delta: 57.8% bullish.
  • Southwest: 62.4% bullish.
  • United: 59.7% bullish
  • American: 62.6% bullish.

Benzinga’s Take

Airlines and cruise stocks have been hit particularly hard by COVID-19, but airlines have two major advantages over the cruise industry.

First, air travel is much more essential to a functioning economy than cruises, which are leisure activities. And second, 51% of cruise passengers are over the age of 50, and this high-risk age group may be even more hesitant to return to normal leisure travel patterns once the outbreak begins to die down.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

 

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