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The airline sector is seeing nice gains today after positive earnings reports from JetBlue (NASDAQ: JBLU) and UAL Corp (NASDAQ: UAUA), and the declining oil futures are helping, too. US Airways (NYSE: LCC) is scheduled to report its third quarter earnings before the market opens on Thursday. In light of major fuel price increases, US Airways has cut its capacity and is considering increasing fares in the next quarter. The airline had better-than-expected traffic over the past few months, and a Goldman Sachs analyst noted that LCC should benefit from fare hikes at low-cost carriers like Southwest (NYSE: LUV), as some customers are likely to defect to US Airways.
On average, analysts are expecting earnings of $1.75 per share, down from $2.74 last quarter, but up from from $1.09 in the year ago period. LCC has beat Wall Street expectations each of the last eight quarters. Though fuel prices have pressured the airlines as oil climbs well into the $80s, the solid earnings from others in the industry this quarter should bode well for the company. If you expect LCC to also report a positive quarter, then now could be a good time to take a look at a bullish hedged trade on the stock.
After hitting a 52-week high of $63.27 in November, the stock slid down to a one-year low of $24.26 in August. LCC opened this morning at $26.65. So far today the stock has hit a low of $26.45 and a high of $28.88. As of 2:35, the stock is trading at $28.71, up $2.21 (8.34%). Technical indicators for LCC are neutral with some deterioration, 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 $20 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 an 8.7% return in two months as long as LCC is above $20 at December expiration. LCC would have to fall by more than 30% before we would start to lose money on this trade.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $20 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 an 8.7% return in two months as long as LCC is above $20 at December expiration. LCC would have to fall by more than 30% before we would start to lose money on this trade.
LCC has not been below $24 at all this year and has shown support around $26. This trade could be risky if Thursday's earnings are a negative surprise, but even if that happens, the stock could be protected by support around $25, where it has bounced four times in recent months.
Meg Massie is an options analyst and writer at Investors Observer. DISCLOSURE: At publication time, Meg neither owns nor controls positions in LCC.
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