Why United Airlines May See More Turbulence Before Leveling Off - United Airlines Holdings (NASDAQ:UAL)

Legendary investor Warren Buffett's paraphrased mantra of being fearful when others are greedy and being greedy while others are fearful is practically taken as gospel. Subsequently, the recent implosion of the stock of major carrier United Airlines UAL would appear to be a perfect opportunity to put the axiom to the test. While UAL stock is certainly on a relative haircut, it's possible that the discount could go even deeper.

Primarily, the airline industry is struggling against macroeconomic concerns weighing heavily on consumer sentiment. Getting ahead of the selling pressure, JPMorgan Chase analyst Jamie Baker revised ratings for multiple carriers, stating that high-level headwinds have been pushing against the sector. Unlike other experts who anticipate a "golden age" in air travel, Baker anticipates a different paradigm.

So far, the airliners themselves have demonstrated hesitation regarding future outcomes. At the start of this week, Delta Air Lines DAL cut its first-quarter revenue and profit guidance. Specifically, the company expects to generate revenue growth of 3% to 4% on a year-over-year basis.

This downgraded guidance falls conspicuously short of the prior range between 7% and 9%. Also, earnings could fall to between 30 cents and 50 cents per share, well shy of the previous guidance of 70 cents to $1 per share. Not surprisingly, given the implications for the industry, UAL stock and its peers fell on the disclosure.

It's fair to point out that some of the concerns impacting major carriers is an acute fear of flying. Following several high-profile incidents, some travelers are understandably apprehensive about taking to the air. Nevertheless, the volatility in UAL stock appears more fundamental.

Despite the latest data, many households have long struggled with inflation in the post-pandemic era. What's more, the current trade war is intensifying, with the Trump administration imposing tariffs and affected nations or regions responding with their own levies. These events are straining an already-vulnerable consumer base, boding poorly for UAL stock in the interim.

UAL Stock Hasn't Come to a Complete Stop Yet

Among the rules in air travel is that upon landing, passengers must remain seated until the seatbelt sign is turned off. It's the same principle with UAL stock. Eventually, the red ink will turn into a veritable buying opportunity. Historically, though, a patient approach is more prudent.

As a baseline, investors generally can acquire UAL stock with a sense of confidence. Using pricing data over the past six years, a long position held for any given eight-week period has a 52.2% chance of rising. While that's not particularly great, over multiple wagers, a speculator should theoretically win out more often than not.

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Interestingly, though, significant behavioral changes occur when UAL stock suffers significant volatility, defined as a one-week loss between 10% and 20%. Under these parameters, investors do buy the dips in UAL…eventually. In the first four weeks following the extreme-fear event—and especially in the first week—the long odds aren't compelling, ranging from a lowly 15.4% to around 54%.

Statistically, starting from the fifth week following extreme fear, the long odds rise above 60%. Therefore, if investors were interested in buying UAL stock outright, waiting for the volatility to truly fade out and level off would appear to be a smarter approach.

Patience also makes technical sense. When viewing a long-term chart, the next level of logical support is around the $50 level. Above this point, trading activity isn't as prominent or well-established. This dynamic suggests that buy orders may not be triggered until UAL stock falls further.

Anticipating a Rough Landing for United Airlines

At this moment, UAL stock is down almost 20% over the past five sessions. That's a clear warning sign that, based on historical trends, circumstances may worsen first before they improve. With this market intelligence in mind, long-term investors may want to wait until UAL falls to around the $50 range (give or take a few bucks) before placing a heavy wager.

On the other end of the risk-reward spectrum, aggressive traders can attempt to profit from falling knives. A gutsy but also tempting trade is the 70/60 bear put spread expiring April 11. This transaction involves buying the $70 put (at a time-of-writing ask of $550) and simultaneously selling the $60 put (at a $171 bid).

Centrally, the idea behind this trade is to use the proceeds from the short put to partially offset the debit paid of the long put, leading to a net cash outlay of $379 (the most that can be lost in the trade). Should UAL stock fall to or below the $60 short strike price at expiration, the trader collects the maximum payout of $621 as of this writing, or a nearly 164% payout.

Of course, traders can go even more aggressive with bear put spreads featuring the $55 short put strike. However, that would mean that the threshold of profitability would be pushed further away, significantly increasing risk.

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