When it comes to the devastation incurred by the COVID-19 pandemic, few sectors suffered as much as the air travel industry. According to the U.S. Bureau of Transportation Statistics, revenue passenger miles for U.S. carriers for domestic and international flights plunged 96% from February to April 2020. At the onset of the global health crisis, circumstances appeared grim for United Airlines (UAL).
To manage the rapidly escalating cases of COVID-19, government agencies made the difficult decision to lock down non-essential activities. Therefore, UAL stock had nowhere to go but down during the early days of the crisis. Even as society gradually acclimated to the new normal, many folks understandably had fears about being stuck in a flying tube with hundreds of other strangers.
However, a bold set of contrarian investors reasoned that investment opportunities like UAL stock couldn’t stay deflated indefinitely. At some point, the crisis will eventually fade, either organically or through the development of therapeutics and/or vaccines. Sure enough, since bottoming in May 2020, UAL shares gradually started to rise.
Unfortunately, since March of last year, upside momentum in UAL stock stalled out. Since then, shares have been stuck in a frustrating bearish trend channel. Even the materializing of positive fundamentals – such as the Biden administration dropping certain COVID-testing requirements for international travelers – could not get United Airlines to arrest its negative trajectory.
With society essentially having normalized at the moment, the narrative should be optimistic for UAL stock. Unfortunately, consumer headwinds such as skyrocketing inflation impeded progress for the airliners. More recently, brewing fears of a recession add confusion to the broader travel sector.
Still, some traders have decided they’re not waiting around for the next move. Therefore, UAL stock became the subject of unusual options activity – and not in an encouraging sense.
Traders Put UAL Stock Atop a Dubious List
When the closing bell rang out for the Sept. 30 session, UAL stock reached the very top in terms of unusual options activity. Bearish traders piled into the $20 put options with an expiration date of Jan. 17, 2025. Puts rise in value when their underlying security declines in the open market. Volume for this trade reached 16,191 contracts against an open interest reading of 171.
Further, the bid-ask spread as represented by the midpoint price ($3.11) came out to 12.2%. Typically, wider spreads indicate lower liquidity for the trade. As well, market makers often give themselves a greater margin of safety for transactions that are difficult to properly place. Naturally, with 839 days to expiration since the placing of the order, there’s a lot that could go right – or wrong.
Perhaps not surprisingly, the latest options activity for UAL stock algins with the predominant trend in the derivatives market. According to data from Barchart.com, the put/call open interest ratio stood at 1.07 on Sept. 30. Usually, the delineation point between bullish and bearish sentiment is 0.70, with figures above this threshold representing bearish sentiment; that is, more traders are buying puts than calls.
Over the past several weeks, analysts’ assessment for UAL stock has been fading. Three months ago, Wall Street experts rated UAL as a consensus “moderate buy.” At the time, only one analyst assigned a “moderate sell” rating to United.
In the current month, the overall consensus rating remains the same. However, two analysts now have bearish expectations for UAL stock, with one “moderate sell” and one “strong sell.”
All Eyes on the Economy
Moving forward, United Airlines will depend heavily on the resilience of the consumer economy. Earlier in the crisis, the influx of dovish monetary policy and unprecedented fiscal support encouraged spending across the board. But now that borrowing costs have risen due to higher interest rates, people may tighten their belts. Left unchecked, this trajectory wouldn’t be helpful for UAL stock.
To be fair, the U.S. economy has held up remarkably well since the onset of the pandemic. However, the problem is that from a monetary and fiscal perspective, this stability came at a price. To unwind the consequences of this excess, some absorption of pain could be required. Therefore, consumers may cut back, not knowing their longer-term employment prospects.
Indeed, a recent report suggests that the vast majority of Americans are concerned that remote employees may be the first on the chopping block should mass layoffs occur. At the same time, many workers are loath to return to the office.
However, job cuts may come fast and furious, with several companies indicating that they may be forced to issue pink slips. Unfortunately, then, those who decide to return to the office now may be doing so too late. And if good jobs suddenly evaporate, this narrative would not be helpful for UAL stock.
Traders See the Writing on the Wall
Ultimately, the long expiry nature of the aforementioned put option provide plenty of food for thought. Traders likely perceive that the writing is on the wall. With circumstances moving unfavorably for the consumer economy, they decided to target UAL stock. It’s a risky trade albeit one that makes fundamental sense.
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