As airlines and other travel companies line up to release second-quarter results, investors will be watching closely for how steep the battle is for the industry before companies return to a 'normal' working environment.
One of the companies being watched is Delta Air Lines (NYSE:), which is expected to release Q2 results before the market opens on Wednesday, July 14.
While statistics announced by the Transportation Security Administration show that the number of air travelers in the US is increasing. On Sunday 11 July, passenger throughput amounted to 2,198,635. For comparison, a year ago (on the same day of the week) that number was 754,545. In 2019 there were 2,669,717.
Air passenger numbers have yet to reach pre-pandemic levels. Nevertheless, travel has clearly made a comeback, leading to positive returns in many stocks in the industry.
Over the past year the and the indices have risen, the indices are up about 41.6% and 60.2%. However, the year-to-date (YTD) returns were more subdued and the two indices rose 1.6% and 14.1% respectively.
Similarly, Delta Air Lines is up 59.8% in the past 12 months and 6.5% YTD. On March 15, DAL shares hit a 52-week high of $52.28. But before the start of the pandemic in early 2020, the stock was $60 shy.
For comparison, here's how Delta's two main competitors performed in the past year:
American Airlines (NASDAQ:): up 79.2% in the past year and a increase of 32.1% YTD;
United Airlines (NASDAQ:): Up 59.4% over the past year and up 17.1% YTD.
Before Q1 earnings release in mid-April, DAL share was $50. On Monday, July 12, it closed at $42.85. Most analysts agree that airlines should benefit from increased bookings and travel in the second half of the year. Understandably, Delta Bulls hope the bullish mood will soon translate into a higher stock price for the company.
So today we look at DAL stocks to see how investors might consider selling cash-backed put options. Such a transaction could be especially attractive to those looking to receive premiums (from put sales) or who may wish to own Delta Air Lines stock for less than the current market price of $42.85 at the time of writing. In terms of price predictions for 12 months, the average target for the Atlanta-based airline is $55.
We previously discussed the detailed mechanics of cash-backed sales of puts with ExxonMobil shares. Readers new to selling may want to consider reading that article.
Selling cash puts on DAL shares
bullish on a stock like Delta during the time frame extending to the option's expiration date. They generally want one of two things. In other words:
Monetization (via the premium received from the sale of the put); Or
Own a certain stock but find the current market price per share (i.e. $42.85 for DAL now) higher than what they would be willing to pay.
One put option contract on DAL shares is the option to sell 100 shares. Cash-secured means the investor has enough money in the brokerage account to buy the security if the stock price falls and the option is granted.
This cash reserve must remain in the account until the option position is closed, expires, or the option is assigned, meaning ownership has been transferred.
Let's assume an investor wants to buy Delta stock, but does not want to pay the full price of $42.85 per share. Instead, the investor would prefer to buy the stock at a discount within the next six to 10 weeks.
One possibility is to wait for the DAL stocks to fall, which may or may not be. The other option is to sell one contract of a cash-backed Delta put option.
As a result, the put seller would assume the obligation to buy potentially 100 shares of DAL at maturity at maturity (the strike price), and now be paid a certain amount of premium for entering into those shares. obligation
So the trader would typically write an at-the-money (ATM) or out-of-the-money (OTM) DAL put option while simultaneously setting aside enough money to buy 100 shares of Delta stock.
Let's assume that the trader executes this trade until the option's expiration date of September 17th. Since the stock is currently at $42.85, an OTM put option would have a strike of 41. So the seller would have to buy 100 shares of Delta for $41.00 if the buyer of the option were to exercise the option to allocate it to the seller.
The DAL September 17, 2021, 41-strike put option is currently offered at a price (or premium) of $1.77.
An option buyer would have to pay $1.77 X 100, or $177 in premium to the option seller. This premium amount belongs to the option writer (seller) whatever happens in the future, i.e. until or on the day of expiration. This put option will stop trading on Friday, September 17.
Risk/reward profile for unmonitored cash-secured put sale
Assuming a trader would enter this money now – secure trading put options for $42.85, at expiration on September 17, the maximum return for the seller would be $177, excluding trading commissions and fees.
The seller's max profit is this premium amount if DAL shares close above the strike price of $41.00. If that happens, the option will expire worthless.
If the put option is in the money (meaning the market price of Delta shares is less than the strike price of $41.00) before or at expiration on September 17, this put option can be assigned, and the seller would are required to purchase 100 shares of DAL stock at the put option's strike price of $41.00 (ie $4,100 in total).
The breakeven point for our example is the strike price ($41.00) minus the option premium received ($1.77), i.e. $39.23. This is the price at which the seller would lose money.
Finally, the maximum loss calculation assumes that the put seller has been given the option and purchased 100 shares of Delta at the strike price of $41.00. Then the stock could theoretically fall to zero.
If the put seller is assigned the option, the maximum risk is similar to that of stock ownership, but partially offset by the premium received (of $177).
Bottom Line
Cash-secured put selling is a fairly more conservative strategy than buying a company's stock at the current market price. This strategy may be a way to profit with caution from the jerkiness in Delta stocks during earnings release.
The investors who end up owning DAL shares as a result of selling puts may further consider setting up covered calls to increase the potential return on their shares. In other words, selling cash-backed puts can be considered the first step in owning stock. Once the investor owns 100 shares of Delta Air Lines, he/she can also sell covered calls and potentially further increase returns.
