It’s no secret that airline stocks are still suffering tremendously from the crowd-phobia that the novel coronavirus created. United Airlines (NASDAQ:UAL) is down more than 55% this year and lagging 10% behind American (NYSE:AAL) and Delta (NYSE:DAL), and 50% behind Southwest Airlines (NYSE:LUV). Interestingly when markets fell hard on Thursday, UAL stock was the only major U.S. airline in the green. Maybe it’s an omen of better things to come due to stronger investor conviction.
Today the message is upbeat. While I acknowledge the risks, the price action is bullish. If the UAL stock buyers can beat $41, they can trigger a bullish pattern with room to run. But first there are a few harsh realities to recognize.
I flew UAL this summer to my 11-day vacation in Cancun. Yes, I was one of the daredevils that refused to be beaten by a virus. But 75% of our vacation group opted to cancel their trips, and therein lies the problem for airline stocks.
According to the TSA, air travel is still down 75% to this time last year. However, this problem here is also the opportunity that lies ahead. Eventually, people will need to travel again.
Rinse and Repeat UAL Stock Trade Strategy
In the middle of May I suggested to not chase the upside. I suggested trading it via options. That yielded easy profits without much worry. Today the goal is to set up a similar trade that also does not need upside to profit. While the experts are still talking of potential bankruptcies, I think it’s unlikely. Until the elections are over and done with, politicians are not going to let that happen. But first let’s discuss the airline micro-economic situation.
Also during my travels this summer the flights were overbooked. This is an indication that management is doing a great job with efficiency. In fact they canceled our original flight last minute to combine us with another. While this was a mad scramble for my family, it is a testament to bold moves.
With time the psyche will heal and the fear of crowds will abate. Demand will recover and the United Air staff would have picked up good frugal strategies they can carry forward. Good habits during duress may turn out to be the upside that keeps on giving thereafter.
Airlines Are Not Sitting Still
In fact, soon they will lay off thousands of workers if the handout doesn’t come from the government. They do have the option to borrow but they are holding out for the free money. They probably figure they have leverage going into an election. Between UAL and American Airlines there are 30,000 jobs in danger. Besides, they borrowed over $60 billion already this year, so it would be good if they can avoid more.
The fundamental metrics are still bruised so there is no sense of addressing their ratios. They are all out of whack and definitely expensive. However, UAL stocks have the backing of the U.S. government. They are committed to saving airlines from demise because they are far from breakeven.
Meanwhile managements have shored up their balance sheets and reduced the cash bleed as much as possible. Time is the missing ingredient or maybe a miracle vaccine headline could boost things in the right direction. I personally have no problems traveling. In fact my son left with his auto race team to Tulsa. And the rest of us will all be on a plane again in November. Maybe more people will get the courage to do the same if armed with a vaccine.
The Price Action in United Airlines Stock Is Healthy
Technically the UAL stock bulls are in charge. They are setting higher lows and attacking the $41 neckline. When they breach it they will have another 25% rally in sight. There will be resistance along the way, of course, but the path would be set.
My favorite way to take a directional position is to sell risk against the fears. This like last time would generate income without needing the rally to materialize. Investors can sell the January $28 put and collect over $2 for it. This trade wins as long as price stays above $28 this year. This is true even if the stock falls another 25% from here. The breakeven point would be under $26 per share.
Buying the United Airline shares for the long term also works. But it is hard to pick a perfect entry point and forecast an upside target. It is much easier to figure out where the price is not likely to go. If there is trouble ahead then selling puts will result in owning shares, but at a huge discount.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.