There is no question Delta Air Lines (DAL) is having a good year in the markets. Up 30% in 2024 and 55% over the past six months, it is definitely on a roll.
Both technical and fundamental indicators suggest its stock is worth owning. The Barchart Technical Indicator rates it a Strong Buy. Further, all 17 analysts covering Delta also rate it a Strong Buy (5.00 out of 5) with a target price of $58.35, 11% higher than where it’s currently trading.
I believe Delta is the best U.S. airline stock to buy. However, that’s not the point of this commentary.
It’s Friday, which means I’m talking about unusual options activity. In Thursday’s trading, Delta had three unusually active put options with Vol/OI ratios of 17.62, 2.90, and 1.37. All three present reasonably attractive income opportunities for contrarian investors.
Have an excellent weekend!
Why Sell Puts When You Can Buy Calls?
That’s an excellent question. If it’s the best U.S. airline stock, as I believe it is, I should have no problem recommending one or more call options to buy. And that I will do.
However, yesterday’s trading didn’t have any unusually active call options, and as I mentioned, my Friday commentary is about unusual options activity. Maybe some other time.
In the meantime, I would look for a call option between $65 and $70, higher than its all-time high of around $62. I’d also want a reasonably lengthy expiration date and a small down payment to reduce the risk proposition.
The Dec. 20 $65 call has an ask price of $1.83 for a 2.8% down payment. Given the $70 strike also has a 2.8% down payment, it makes sense to go with the lower strike price.
You have 224 days for the stock to appreciate 26% before considering exercising your right to buy 100 shares of Delta stock. With a delta of 0.26084, you can double your money by selling the call before expiration if it appreciates $7.02 (13.3%) based on its current share price of $52.89.
The risk/reward seems reasonable.
Put Option #1 - May 17 $52
Starting with the earliest expiry, the $52 put expires a week today. It is currently slightly out of the money, so you could face buying the shares next Friday, but that wouldn’t be the worst thing to happen.
Based on yesterday's closing bid price of $0.51, your net price would be $51.49. Given its momentum in recent weeks, up 14% in the past month, it’s hard to imagine it turning negative, but you never do know.
From an income standpoint, the $0.51 premium is an annualized yield of nearly 51% based on Thursday’s $52.75 closing price.
Who wouldn’t want that kind of return?
Put Option #2 - July 19 $50
This one is further out, expiring in 70 days with a $1.46 bid price and an annualized yield of 14.6%. Sure, it’s not 51%, but if you’re interested in pocketing the income and not necessarily owning Delta shares, the $48.54 net price you’d have to pay is much more attractive on the downside.
With 10 weeks to expiry, the risk of a significant correction is considerably less than if the DTE was 133, as it is for the third unusually active put option mentioned below.
In the worst-case scenario, you must buy the shares for $48.54. It hasn’t traded this low since mid-April. Of course, you could argue that losses are unlimited should it fall below this level.
Put Option #3 - Sept. 20 $55
Based on yesterday’s closing price, the final unusually active put was in the money by 4.1% or $2.25. The $4.70 bid price had an annualized yield of 23.3%, higher than the July put, but also possessing an expiry date nine weeks longer.
Regarding options, that amount of time can feel like an eternity. With a net price of $50.30, it sits in between the July put and the put expiring next week.
As I’m bullish about Delta, I don’t envision a significant correction for DAL. It’s had one correction of more than $4.70 since December, when it announced its Q4 2023 results. While the quarter’s numbers were good on both the top and bottom lines, it cut its 2024 guidance for earnings per share from more than $7 to $6.50 at the midpoint, which spooked investors.
In April, it reported an adjusted EPS of 45 cents, nine cents better than analyst expectations, with revenue of $12.56 billion, $30 million shy of the consensus. More importantly, it’s projecting $3.5 billion in free cash flow in 2024, more than double the $1.14 billion generated in 2023.
The Bottom Line
When your first and only concern is generating income, you don’t want to expose yourself to unnecessary risk brought on by a longer duration.
While the 23.3% annualized yield of the $55 put is attractive, the $50.30 net price is a little too close for comfort given the nearly five-month expiry. So, too, is the $51.49 net price of the $52 put.
The $52 put is the best combination of risk and reward for income investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
