Here's How Large Airline Option Traders Are Playing The Wuhan Coronavirus Scare

Southwest Airlines Co LUV has been mostly grounded in the past year, gaining just 7%. However, the Wuhan coronavirus has investors worried about the near-term outlook for international travel, and large option traders appear to be betting on domestic U.S. airline Southwest over its international airline peers.

The Trades

On Thursday, Benzinga Pro subscribers received nine option alerts related to unusually large trades of airline options. Here are a handful of the biggest:

• At 9:36 a.m., a trader sold 500 American Airlines Group Inc AAL put options with a $27 strike price expiring on Feb. 21 near the bid price at $1.604. The trade represented an $80,200 bullish bet.
• At 10:30 a.m., a trader bought 1,100 Southwest call options with a $55 strike price expiring on Friday near the ask price at 30 cents. The trade represented a $33,000 bullish bet.
• At 11:33 a.m., a trader sold 756 American Airlines call options with a $40 strike price expiring in January 2021 near the bid price at 60 cents. The trade represented a $45,360 bearish bet.

Of the nine total large airline option trades on Thursday morning, three were calls were purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. Four trades were calls sold at the near the bid or puts purchases at or near the ask, trades typically seen as bearish. The two largest trades of the morning were executed near the bid-ask spread midpoint, trades typically considered neutral.

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 modest size of the largest airline trades on Thursday by institutional standards, they are unlikely to have been institutional hedges.

Wuhan Coronavirus Plays?

The market has seemingly had a mixed initial take on the potential impact of the Wuhan virus. Initial reports of the virus were mostly ignored by the market, but news of it spreading within China and even one documented case in the U.S. this week ahead of the upcoming Chinese New Year celebration appears to have rattled the market.

Assuming the Wuhan virus is mostly contained within China, the seemingly obvious airline play would be to go long Southwest and other primarily domestic U.S. airline stocks and short American and other international airlines. However, it seems based on the mixed trading on Thursday that large option traders seem to be on the fence as to whether or not the Wuhan virus poses enough of a risk to even trade at this point.

Benzinga’s Take

Analysts are downplaying the impact of the Wuhan virus up to this point, suggesting any airline stock weakness this week could be a long-term buying opportunity. Bank of America analyst Andrew Didora said United Airlines Holdings Inc UAL has the most exposure to Asia of all the “big four” U.S. airline stocks.

Do you agree or disagree with these predictions? Email feedback@benzinga.com with your thoughts.

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