Continental Airlines, Inc. (NYSE: CAL) shares are trading higher today as oil futures are sinking today, dropping below $80 per barrel and giving most airline stocks a boost on the expectation of lower fuel costs. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CAL.
After hitting a one-year high of $52.40 in January, the stock dipped to a one-year low of $26.21 in August. CAL opened this morning at $35.30. So far today the stock has hit a low of $35.25 and a high of $36.98. As of 10:50, CAL is trading at $36.30, up $0.85 (2.4%). The chart for CAL looks neutral and deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $25 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just 11 weeks as long as CAL is above $25 at December expiration. Continental would have to fall by more than 15% before we would start to lose money. Learn more about this type of trade here.
CAL hasn't been below $25 at all in the past year and has shown support around $30 recently. This trade could be risky if the company's earnings (due out on 10/18) disappoint or if fuel costs start to rise again, but even if that happens, this position could be protected by support the stock has formed around $30 where the stock has bounced twice in the past 2 months.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CAL.
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