Southwest Airlines: In Love with LUV Calls

It’s a beautiful Monday morning and all major U.S. markets except the Dow Jones have started on a bearish note as the S&P 500 continues to consolidate under 2000. However, we are undaunted by the consolidation in the market as we explore new possibilities for profitability in the options of Southwest Airlines Co. (NYSE:LUV).

Southwest Airlines with its market capitalization of $23.36B operates Southwest Airlines and AirTran Airways, passenger airlines that provide scheduled air transportation in the United States and near-international markets. The company is easily one of the most profitable low-cost airlines in the world despite the fact it consistently offers low fares.

Soaring to New Highs

LUV Stock Chart

The chart above shows how shares of Southwest Airlines have traded in the year-to-date period. You will observe that shares of Southwest Airlines have soared by an impressive 81.58% since the markets opened this year. An interesting point to note is that Southwest Airlines’ 81.58% gains in the YTD dwarf the gains of 7.20% reported by the S&P 500 within the same period.

I am most impressed with the rate at which the stock is soaring northbound to make new highs. For instance, the stock made a new has made a new high to $34.50 from an opening price of 33.99 today. In fact, the stock has made 18 new highs within the last one month. The stock is trading above its 20, 50 and 200-day moving averages today as it continues to make new highs.

More Reasons to Love LUV Calls

  1. Entering New Markets with Additional Routes

Southwest Airlines’ days as a domestic airline operator became numbered after its acquisition of AirTran. The company will start plying routes that were earlier plied by AirTran as the two companies continue the integration process to become a single entity. The company recorded its first international flight on July 1 as it started plying locations in Aruba, Bahamas and Jamaica with an additional seven non-U.S. cities to be included in travel plans by the end of the year.

However, the company is not resting on its laurels as it announces that it would be adding trips into Central America into its offerings. Southwest Airlines has announced that it would be flying from Baltimore to San Jose, Costa Rica starting from March 7 to mark its first international trip outside of forays into the Caribbean.

I strongly believe that the addition of new destinations will allow the company report more revenue per passenger as the company continues to stay competitive with its unique selling point of low-cost fares.

  • 2. Cutting Costs by Rightsizing Fleet

Southwest Airlines has been able to maintain and grow its market share in the industry through its competitive advantage of consistently offering low-cost fares. However, offering low-cost airfares might not make much business sense unless the company is able to cut costs without reducing the quality of its service.

Southwest Airlines’ determination to rightsize its fleet, though initially pricey will turn out to be a strategic move that will keep the company competitive in the long term. For instance, the company is replacing the Boeing 717 aircrafts currently being used by AirTran with the Boeing 737 – 800 models as a means to reducing the company’s unit cost. The company is also working towards outfitting its aircrafts with scimitar winglets, which are expected to generate fuel savings of 5-5.5% per aircraft.

How to Trade LUV Options

I am impressed with the performance of Southwest Airlines and I am in love with LUV calls. I strongly believe that you can’t go wrong putting some money on the LUV Dec 2014 35.000 call (LUV141220C00035000) at an asking price of $1.45. However, this is one contract you must watch hawkishly in order to know when to jump ship and run with your profits.

— Daily Option Alerts

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