U.S equity markets are closed today as we remember and honor Martin Luther King Jr. One of my favorite Martin Luther King’s quotes says, “We might forget what our enemies said but we will never forget the silence of our friends.” Against this backdrop, I want to share with you an important options trade that I think you should enter as soon as markets open tomorrow.
In today’s piece, we will examine the options of American Airlines Group Inc. (NASDAQ:AAL). American Airlines Group with its market capitalization of $35.73B provides scheduled jet service to approximately 160 destinations throughout North America, the Caribbean, Latin America, Europe and Asia. AMR Eagle Holding Corporation, a wholly owned subsidiary of the Company, owns two regional airlines, which do business as American Eagle-American Eagle Airlines, Inc. and Executive Airlines, Inc. American also contracts with an independently owned regional airline, which does business as AmericanConnection
Why We Are Looking at American Airlines Today
The chart above shows you how the shares of American Airlines have traded in the last one year. The chart shows a 65.92% increase in the share price of American Airlines in the last one year. You will observe that the stock took a plunge in October when the news about Ebola hit the airwaves and people became afraid of travel. However, the stock bounced back nicely to end the year around its 52-Week high of $54.64.
Reasons to be Optimistic about American Airlines
American Airlines is set to release its Q4 2014 results next week on Tuesday (Jan 27) and I have reasons to believe that the company will deliver impressively in its top and bottom lines for the fourth quarter. The expected fourth quarter outperformance will naturally make the stock attractive to investors; hence, options traders stand a good chance of raking in profits by buying call options for the following reason.
Falling Oil Prices
An important reason for optimism on the prospects of airline stocks such as American Airlines is the persistent drop in global crude oil prices. Data from the International Air Transport Association (IATA) has forecasted that the profits of airline companies could rise by as much as 10.6% on an annual basis in 2015 to $19.9B up from a forecast of $18.0B that was given in June 2014.
Crude oil prices have already dropped by more than 50% from $110 per barrel to $52 per barrel and thus, the prices of petroleum products have also dropped drastically. For instance, jet fuel (used by the airline industry) has also dropped by more than 50% from $2.92 per gallon for much of 2014 to the current $1.42 per gallon price.
In essence, the drop in the price of fuel, which is the biggest cost for airlines, will help American Airlines to record lower operating costs. Lower operating costs will in turn help the company generate better profit margins and investors are likely to take note and start buying up the stock. The fact that American Airlines has a P/E ratio of 7.94, which is excellent for any company and an RSI of 47.31 (slightly oversold) suggests that the buying action will be strong on the stock.
How to Trade AAL Options
I am bullish on American Airlines and I recommend buying AAL call options. The AAL May 2015 60.000 call (AAL150515C00060000) look attractive at an asking price of $2.02. You can set a stop/limit loss order at $1.90.
— Daily Option Alerts