JetBlue Airways Corp. (NASDAQ: JBLU) opened higher this morning after the airline reported a first-quarter loss of $8 million, or 4 cents a share, narrower than analyst estimates of 7 cents per share. However, losses from competitors like United (NASDAQ: UAUA) and record-high oil prices have brought JetBlue stock down for a rough landing. If you think that the company's earnings are the real deal and it 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 JBLU.
After hitting a one-year high of $11.99 in July, the stock hit a one-year low of $4.30 in January. JBLU opened this morning at $5.10. So far today the stock has hit a low of $4.50 and a high of $5.11. As of 12:40, JBLU is trading at $4.57, down $0.36 (-7.3%). The chart for JBLUlooks 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 covered call at the $5 level. A covered call is an options position that combines the purchase of stock with the 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 34.4% return in eight months if JBLU is above $5 at December expiration. JetBlue would have to fall by more than 18% before we would start to lose money. Learn more about this type of trade here.
JBLU hasn't been below $4 at all in the past year and has shown support around $4.50 recently, while the break-even point of this position is near $3.70. This trade could be risky if fuel prices continue to skyrocket, but even if that happens, this position could be protected by the support the stock might find around $4.30, at its 52-week low.
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 JBLU or UAUA.
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