How Should Investors Respond to Unusual Options Activity for Delta (DAL)?

With inflation sentiment running hotter than expected recently, the equities sector took a dive last week. Naturally, investors feared that the Federal Reserve will implement a more aggressive monetary tightening initiative, possibly risking a recession. At the same time, Delta Air Lines (DAL) enjoyed a stout performance, with many traders eagerly bidding up DAL stock. The question is, how should investors respond to this dynamic?

The contrast between DAL stock and the broader equities sector couldn’t be starker. After significant battles between the bulls and bears, the pessimists took control of the trajectory, sending the benchmark S&P 500 down 2.4% on Friday. For the week, the index slipped 1.2%.

On the other end of the scale, DAL stock gained 2.3% on the session heading into the weekend. And for the week, it gained a very impressive 5.4%. What might have initially caught some folks off guard was that Delta’s third-quarter earnings report wasn’t that special.

Per Zacks, earnings of $1.51 per share (excluding non-recurring items) fell short of the consensus estimate of $1.56. Escalated operating expenses contributed to the miss. In addition, “Delta reported revenues of $13,975 million, which lagged the Zacks Consensus Estimate of $14,157.2 million.”

“Multiple flight cancellations and booking weakness due to Hurricane Ian also hurt results. Delta reported earnings of 30 cents per share a year ago, dull in comparison to the current scenario, as air-travel demand was not so buoyant then,” Zacks’ Maharathi Basu added.

However, DAL stock managed to rise higher despite the disappointing news. While inflation and the erosion of purchasing power hurt demand in the domestic market, Delta and other airline companies enjoy a perhaps cynical catalyst: international air travel.

Frankly, the Fed’s implementation of hawkish monetary policies to control inflation makes other currencies weak in comparison. In Japan, this circumstance is particularly acute, leading to a possible tailwind for DAL stock.

Traders See Massive Opportunity in DAL Stock

Following the conclusion of the Oct. 14 session, DAL stock ranked among the securities featured in Barchart.com’s screener for unusual options activity. Specifically, bullish traders targeted the $32.50 calls with an expiration date of Oct. 21, 2022 – this coming Friday.

Volume for the transaction reached 19,625 contracts against an open interest reading of 843. Moreover, the bid-ask spread as represented by the midpoint price (37 cents) came out to 5.41%. While hardly the widest spread, the margin is fairly significant considering the nearer-term expiry. Usually, wide spreads indicate lower levels of liquidity.

For the record, DAL stock closed at $31.08 in the open market. Therefore, shares need to rise 4.57% in a week to be at the money. Though it’s not an impossible feat, it’s rather risky because of the broader market weakness.

As well, the aforementioned calls moved slightly against the predominant trend in the options arena. According to data from Barchart.com, the put/call open interest ratio currently stands at 0.79. Generally speaking, the delineation point between bullish and bearish sentiment is 0.70, with figures higher than this threshold indicating bearish sentiment (as more people are buying puts than calls).

Interestingly, though, Wall Street’s assessment of DAL stock is strongly bullish and is on an upward trajectory. Three months ago, 12 analysts rated Delta as a “strong buy” and two rated it as a “hold.” Now, 13 analysts rate it as a “strong buy” and only one rates it as a “hold.”

Compelling But Also Risky

In September, when the Japanese government announced that it would reopen the country to foreign tourists on Oct. 11, many people welcomed the positive development. For one thing, Japan represents a major tourist hotspot. On the other end of the scale, Japanese businesses have been hurt by the COVID-19 pandemic and subsequent government-mandated shutdowns. This is an opportunity to make up for lost time.

Certainly, DAL stock and other airline investments tethered to international routes fundamentally benefit from this paradigm shift. At the same time, it’s curious that the call options for Delta are short term in nature. Moving forward, the framework isn’t completely bullish for DAL.

To be sure, international carriers will benefit – there’s little doubt about that. At the same time, the weak yen may not be sustainable. The latest data indicates that this currency weakness resulted in higher costs, thereby weighing on the country’s business sentiment.

In other words, the Bank of Japan may play along for now to maximize the nation’s tourism appeal. However, staying the course of low interest rates will be extremely risky for Japan moving forward. Therefore, the fundamental attractiveness of DAL stock may have a limited time span.

Timing is Everything

For those wagering from the perspective of hopefully securing short-term profits, DAL stock might make sense. Again, Japan’s reopening represents a major catalyst for airliners. However, monetary tightening may become the norm, not only in the U.S. but everywhere. Japan probably can’t afford to be the oddball. Therefore, the bullish narrative may be working against the clock.

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