Southwest Airlines: Fly High with LUV Call in 2015

The need to travel by air will increase and the volume of air travels is likely to increase as the holiday season continues and as we prepare to enter into the Christmas holidays. Interestingly, an increase in the volume of air travel traffic will invariably lead to an increase in the revenue and profitability for airline companies; hence, we will consider the options of Southwest Airlines Co (NYSE:LUV) today.

I chose to examine the options of Southwest Airlines in anticipation of increased air travel in the next couple of weeks because the company is the largest domestic airline operator in the United States.

Southwest Airlines with its market capitalization of $27.43B 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.

Update on Recent LUV Options Recommendations

Exactly three months ago, I wrote a piece on Southwest Airlines titled, “In Love With LUV Calls”. In that piece, I mentioned how the shares of Southwest Airlines have been soaring to new highs with an impressive 81.58% gain in the first nine months of the year. I then concluded that piece by recommending that you purchase the LUV Dec 2014 35.000 call (LUV141220C00035000at an asking price of $1.45.

When I wrote that post, shares of Southwest Airlines were trading around $34.20 per share and the call options that I recommended was available at a $1.45 asking price. Three months down the road, shares of Southwest Airlines have gained 18.24% to a $40.44 trading price around 11:52AM EST today. The call options that I recommended had jumped 279.3% to a $5.50 asking price today.

That LUV December 35 call is set to expire this Saturday and I cannot find a single logical reason to hold on to the contract beyond now. I recommend selling the contract to close and running with almost 280% in profits within the space of three months.

New LUV Coverage

If you are new to the Southwest Airline trip, it might interest you to know that the company still has much upside potential ahead as we head into the New Year. I have already mentioned the potential increase in the number of people flying during the holidays. Data from the International Air Transport Association (IATA) shows that the association expects airline profits to rise 10.6% on an annual basis to $19.9B this year up from the $18.0 forecast that was given in June.

The expected increase in profits for airline companies is linked to the massive fall being recorded in global oil prices. You will remember that global oil prices have been falling steadily in the last couple of months as supply continues to outpace the demand. Interestingly, the drop in oil prices invariably means that Southwest Airlines will be able to recording lower operating costs and attract more flyers with consistently low airfares.

How to Trade LUV Options

I am optimistic about the prospects of Southwest Airlines going forward and I think you will do well to join the bullish flight on the stock. Analysts at Zacks have a Number 1 “Strong Buy” rank on the stock and they have an “Outperform” rating on the stock. I recommend buying the LUV Mar 2015 42.000 call (LUV150320C00042000) at an asking price of $2.40.

— Daily Option Alerts

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