American Airlines (NYSE: AMR - option chain) shares are rising today along with most other major airlines this morning after the International Air Transport Association said international passenger demand rose 0.3% year-over-year in September, the first month of growth in the past year. AMR, Delta (NYSE: DAL), Continental (NYSE: CAL) and United (NASDAQ: UAUA) are all in the green between 2% and 3% so far today. If you think that AMR 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 the stock.AMR opened this morning at $5.68. So far today the stock has hit a low of $5.55 and a high of $5.70. As of 11:50, AMR is trading at $5.57 up 13 cents(2.4%). The chart for AMR looks neutral and S&P gives AMR a neutral 3 STARS (out of 5) hold ranking.
For a bullish hedged play on this stock, I would consider a February bull-put credit spread below the $4 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 25.0% return in four months as long as AMR is above $4 at February expiration. AMR would have to fall by more than 28% before we would start to lose money. Learn more about this type of trade here.
AMR has not been below $3.75 -- which is the break-even point on this trade -- since April and has shown support around $5.30 recently.
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 any airline stocks, including those mentioned.
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