Airline Plays on Falling Oil

Oil continues its decline falling by over $5 today. I mentioned pure oil plays in last Thursday’s blog (“Texas Tea Proxy Plays”) and want to mention that going long the airline stocks is another ancillary way to profit from the drop in oil.

Most of the major US air carriers have staged significant comebacks on the order of 200-300% in just the past week! Many are on the verge of breaking out of their bases, most notably Airtran (AAI), United (UAUA), Northwest (NWA), Delta (DAL), Alaska (ALK), and American (AMR). Most of the stocks hit the ground running this morning and I thought that many of them would break out, but the airline rally starting losing steam by midmorning and has taken a nose dive in just the last half hour (3pm ET). Northwest (NWA), for example, was down $1.65–20% off its intraday high just a couple of minutes ago but is now charging back and is up almost a point since I began this paragraph. Talk about intraday volatility–wow! [Chartwise, I saw this turnaround coming as it put in three long bottoming tails on the 5 minute chart just before exploding to the upside.]

I’m not here to relate intraday movements but I couldn’t resist as today has been an exceptionally wild ride for the group. My purpose here is to give you some airline plays that are viable for the next couple of weeks, or until oil finds a bottom and begins to turnaround.

My airline picks
The above mentioned stocks sport the best charts with Air Tran (AAI) looking to be the best of the bunch. It’s also the cheapest one of the group currently trading at $3.36. The November options field isn’t very robust but if you’d like to own the stock at $2.50, you could sell a cash-secured Nov 2.5 put (open interest = 10). The current price is $0.15 x $0.25 and you might be able to pick it up for $0.20 which amounts to an 8% naked yield. Plus, the option is trading at a premium which we love when selling options. (See Recipe #6 for strategy details.)

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