Airlines erupts to the pandemic, COVID-19 has decimated airline stocks. Thus far, they haven’t recovered. Information by YCharts The fall is more than warranted by plummeting aviation and shocking cash burn many airlines. A possible COVID-19 vaccine isn’t anticipated until at least 2021, and that is if one of those innovative candidates has achievement. Also, the recovery in travel need stalled in June. Despite continuing losses, many investors continue to purchase those stocks. Airline titles are very popular on Robinhood – a stage which caters to retail dealers (at least they were before Robinhood ceased representing # of consumers holding). You may view it partly evidenced by the reduction in institutional ownership. Info by YCharts The matter with purchasing airline stocks right now is they have mostly been trading based on information, but before a vaccine or herd immunity is accomplished, airlines have significantly more pain to survive and there are other upside catalysts viable since the await a return to ordinary proceeds.
Supply: Statista As SA writer Aleksey Razdolgin points out in a current post concerning Alaska Air Group (ALK), “It is about bandwidth”. Airlines have assembled their cash heap and must endure on it. Alaska has cut costs and improved liquidity, but there’s just so much that’s potential in an asset-heavy sector with high fixed costs, plus they have a lot more months of the pandemic to fight. Aleksey decided to obtain the ALK stock, but I want to outline why you need to think about selling put options rather – particularly using market volatility priced in flat-rate amounts. Alternatives As of writing, You’ll be able to sell ALK $20 Puts expiring Jan. 21, 2022, for $340 per contract – an 11.7% Nominal return using a hit price -45% under the present price. There is a good deal of downside protection in contrast to possessing the stock, and you still make above-average returns even in a scenario of 0 to -45% performance in underlying stock. Although I wouldn’t bet on a rebound in airlines, I am willing bet on a continued environment of relatively easy borrowing combining with long-term investors and value hunters to prevent the stocks from getting too far into depressed territory. All of that is why relatively far OTM (out of the money) options seem like the best option.
Two more options that look appealing to sell: Southwest Airlines (LUV) $25 Put expiring Jan 2021 for $1.73 Southwest has a cash burn of about $500 million per month, but it has enough cash to last nearly 2.5 years at that rate without needing to raise cash. With a strong brand, management team, and balance sheet, it feels great to get a 14% annual yield on an option -25% below the current price. I wouldn’t even be disappointed to be assigned shares below the strike price since the massive cash pile means I won’t get diluted while Southwest waits out the current crisis. As a stronger player, it might even come out of it more profitable than before if the pandemic leads to more consolidation or bankruptcies that reduce competition. American Airlines (AAL) $1, $2, or $3 Puts expiring Jan 2021 Although more leveraged than many airlines, American still has enough cash to last 11 months at the June burn rate and has been able to access credit markets at reasonable rates – 11% for senior unsecured 2025 notes. With annual yields of approximately 12-15%, far OTM puts expiring from half a year are an enticing wager against American losing most its equity value in the near term. It would take a significant bankruptcy risk for prices to go that low. By the date of expiration, American should still have six months of cash on hand and another six in borrowing capacity (more if the burn rate continues on a positive trajectory) and a vaccine should feel even closer. That combination makes me confident enough to bet against a collapse of the stock in exchange for a double-digit return. Keep in mind that there are plenty of other options to sell at different expirations, strike prices, and on other airlines. It’s worth exploring what you have available. Airlines lack the catalysts to drive a bull narrative but have enough cash to whether another year – or several – of this environment, which is the reason why selling puts in elevated volatility levels seems to align better with the likely outcome to them.
Disclosure: I am/we are short AAL $1 PUTS. I wrote this article myself, along with it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned at the post.