Unusual Options Activity Review: Airline Sector - American Airlines (AMR), United Airlines (UAUA), Southwest Airlines (LUV) & AMEX Airline Index (XAL)
General Sentiment
US averages were generally lower yesterday ahead of the holiday, effectively undoing Tuesday's late-afternoon gains. As the session drew to a close, the benchmark S&P500 was down more than 1% in active trading.
Despite the short day on Friday, the CBOE VIX is up nearly a point to 25.61 as traders avoid adding risk to their books. At mid-afternoon, the total options volume was approaching 10 million contracts with puts slightly outpacing calls.
Airlines (AMR, UAUA, LUV, XAL Index)
We saw interesting options activity in a number of airline stocks ahead of the holiday. This activity suggests that traders may be positioning for near term news coverage of the record-setting travel weekend. The sector started the day down sharply, but many stocks rallied as the broad market recovered some losses.
American Airlines (AMR)
AMR (parent of American Airlines) was the most active airline name on Wednesday. Over 15,000 calls changed hands, along with half as many puts, in what was generally bullish flow. The stock ended the day up 1.1% to $20.18.
Traders were focused on AMR upside calls, specifically the 22.5, 25, and 30 strikes. There were several multi-market sweep orders in AMR beginning with a purchase of 655 Dec 20 calls for $1.20. This order occurred just after 11am and was followed by 834 Jan 22.5 calls for $1.10.
A large vertical call spread also traded yesterday morning on the NYSE. The seller collected $.28 for 2,000 Jan 25-30 call spreads in what is likely a strike roll or a closing transaction.
United Airlines (UAUA)
UAL was the 2nd most active name in the space on Wednesday, with most activity focused in the upside strikes. A total of 6,600 Jan 45 & 55 calls changed hands in large vertical spreads on the PHLX for $.95.
Southwest (LUV)
LUV options traded triple their normal volume yesterday, with 4,800 puts and 3,400 calls changing hands in very bearish trading. The stock was up slightly to $13.37. We also saw aggressive buying of the December 12.5 puts, with a total of 3,500 on the tape. Sweep orders were used to pay $.35 for most of that volume.
AMEX Airline Index (XAL)
In addition to the above volume, another noteworthy trade took place in the sector earlier this week. This unusual activity occurred in the very thinly traded AMEX XAL Airline index.
On Monday, an institutional customer sold 7000 Dec 42.5 calls for an average price near $1.00 when the index was trading close to 40.23. On Wednesday morning, the index lows near 36.50 made for a net move of nearly 10% over the two day period.
Although the index has since rebounded and is now up to 38.65, the customerís timing was impeccable. If he is able to exit the trade near the theoretical value, he should be looking at a gain of nearly $250,000. Not bad for a few day's work.
Posted By: Trade Alert
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About Henry Schwartz
Henry Schwartz has traded derivatives on US and European exchanges for nearly 20 years. His experience includes market-making and institutional trading at the Hull Group, Salomon Brothers, Bear Stearns and most recently Banc of America Securities, where he led the electronic market-making project coincident with the launch of the ISE. His current work involves real-time stream analysis of options market activity for a number of leading institutional sell-side firms.
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