AMR Corporation (NYSE: AMR) shares are trading higher after the company announced that it will charge passengers $25 for a second checked bag beginning on May 12 to counteract higher fuel costs. AMR is also receiving support from declining oil futures and speculation that airline mergers may allow carriers to increase fares. If you think that the stock 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 AMR.
After hitting a one-year high of $29.32 in July, the stock hit a one-year low of $6.81 last week. AMR opened this morning at $8.00. So far today the stock has hit a low of $7.95 and a high of $8.63. As of 12:20, AMR is trading at $8.50, up $0.76 (9.8%). The chart for AMR looks bearish and steady, 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 June bull-put credit spread below the $6 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 11.1% return in just seven weeks as long as AMR is above $6 at June expiration. American would have to fall by more than 29% before we would start to lose money. Learn more about this type of trade here.
AMR hasn't been below $6.80 at all in the past year and has shown support around $7.40 recently. This trade could be risky if the cost of fuel continues to sky-rocket, but even if that happens, this position could be protected by the support the stock might find around $7, where it bottomed out over the past month.
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.
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