Shares of United Airlines have soared 30% since the start of January while also passing a buy point last week.
Nevertheless, despite a big beat on fourth-quarter earnings, shares sold off, likely because investors had already priced in the good news.
For investors who think United Airlines stock is overextended and that the current breakout will fail, a bear put spread can benefit from further weakness.
Bear Put Spread On United Airlines Stock
To construct a bear put spread, simultaneously buy a put and sell a put at a lower strike price with the same expiration. For United Airlines stock, investors can consider buying a 50 put while selling a 45 put, both with a Feb. 17 expiration.
To place this trade investors would pay a debit of $2 late Thursday. This coincides with a maximum loss of $200 should United Airlines trade above 50 on expiration.
The maximum gain is the width of the strikes minus the debit paid. In this case, a maximum gain of $300 (5-2 x 100) will be realized if United Airlines stock trades below 45 on expiration.
A distinct advantage of a bear put spread as opposed to shorting shares is the limited risk. Particularly in the case of UAL, if an investor is wrong and shares explode higher, the maximum an investor can lose is the debit paid.
United Fails To Take Off Despite Earnings Beat
United Airlines reported its fourth-quarter earnings after hours on Jan. 17. EPS of $2.46 trounced analyst estimates of $2.10 while revenue of $12.4 billion also came above estimates of $12.2 billion. Despite the beat, shares sank 4.5% while continuing lower in Thursday's trading.
Overall demand for air travel continues to return. Nevertheless, issues with labor shortages and an unresolved contract agreement with pilots are headwinds moving forward.
United Airlines currently has an IBD Composite Rating of 93 and a Relative Strength Rating of 88. Shares of the airline broke out hitting a 46.07 buy point on Jan. 11. The stock then continued higher, gaining in eight straight sessions before retracting after the earnings results came out.
