American Airlines (AMR) dives on sector downgrades

Posted Mar 12th 2008 2:24PM by Brent Archer
Filed under: Major Movement, Analyst Upgrades and Downgrades, Bad News, Industry, AMR Corp (AMR), Options, Technical Analysis, Oil

AMR Corporation (NYSE: AMR) stock is falling after a JP Morgan analyst downgraded the stock to "Underweight" from "Overweight." He also downgraded six other airlines, saying record oil prices will hurt profits and could potentially threaten airlines' credit ratings. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on AMR.

After hitting a one-year high of $34.25 last March, the stock has hit a new one-year low today. This morning, AMR opened at $10.62. So far today the stock has hit a low of $9.68 and a high of $10.40. As of 1:00, AMR is trading at $9.70, down $0.97 (-9.1%). The chart for AMR looks neutral and improving, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $14 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 7.1% return in two months as long as AMR is below $14 at May expiration. AMR would have to rise by more than 44% before we would start to lose money.

AMR was above $14 in early February, but has fallen sharply and shown resistance around $12 recently. This trade could be risky if the price of oil and fuel drops off, but even if that happens, this position could be protected by resistance AMR might find at its 50 day moving average, which is currently around $14 and falling.

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 AMR.

Tags: American Airlines, AmericanAirlines, AMR, downgrade, inthenews, Investors Observer, InvestorsObserver, options