Long Call Options Bet Places Spotlight on Delta Air Lines (DAL)

When the COVID-19 crisis initially broke out, few sectors suffered from the pandemic quite like the air travel industry. According to the U.S. Bureau of Transportation Statistics, air revenue passenger miles dropped 97% between February and April of 2020. Since then, carriers such as Delta Air Lines (DAL) bounced back from their lows, boosting the contrarian case for DAL stock and its ilk.

However, it’s also fair to point out that the broader recovery effort has been disappointing. For instance, DAL stock presently trades in a range under $40. In contrast, the average Delta share price just before the COVID-19 implosion stood just under $60. It’s a similar situation with the cruise ship industry, which struggles mightily to regain its prior momentum.

Nevertheless, Delta printed some encouraging numbers for its most recent third-quarter earnings report, leading to a conspicuous sentiment shift. Most notably, the air carrier posted nearly $14 billion in operating revenue, a corporate record. As well, the company posted $1.5 billion in operating income and $695 million in net income.

On paper, the narrative didn’t quite meet analysts’ expectations. For adjusted earnings per share, Delta delivered $1.51 against the consensus target of $1.53. On the top line, the company rang up adjusted revenue of $12.84 billion, down slightly against the forecast of $12.87 billion.

Despite the “paper” miss, management brought home an uplifting narrative. During the Q3 earnings conference call, Delta CEO Ed Bastian remarked that “[t]he demand for air travel remains very strong, and that is reflected in today's results and outlook.”

More significantly, Bastian stated that “[w]e expect our December quarter revenues to maintain this momentum, and we will be 5% to 9% higher than 2019. With strong demand, we expect earnings per share of $1 to $1.25 and a 9% to 11% operating margin. While we face numerous challenges and headwinds this year, Delta has demonstrated its resilience.”

Bulls Anticipate a Gradual Recovery for DAL Stock

Interestingly, since the Q3 disclosure through the end of last Friday’s session, DAL stock gained 13.5% of equity value. Potentially sensing the upside opportunity, bullish traders targeted Delta call options.

Specifically, the $40 calls with an expiration date of Jan. 17, 2025, represented one of the highlights of unusual options activity during the Nov. 18 session. Volume reached 5,041 contracts against an open interest reading of 227. The bid-ask spread as represented by the midpoint price ($7.40) came out to 4.05%.

For the record, DAL stock closed at $34.47 in the open market on Nov. 18. Therefore, it needs to gain a little over 16% for the option contract to be at the money. Given the 790 days since the order was placed till expiration, it appears a reasonable wager given recent circumstances.

At the moment, the broader sentiment in the options arena for DAL stock is slightly negative. Based on data from Barchart.com, Delta’s put/call open interest ratio stands at 0.86. Typically, the delineation point between optimism and pessimism is 0.70, with figures above this threshold indicating that more traders are buying puts than calls.

However, Wall Street experts maintain a highly optimistic view of DAL stock. Three months ago, analysts gave a consensus rating of “strong buy” for Delta, broken down as 12 strong buys and two holds. In the current month, the consensus rating remains the same. However, the breakdown is 13 strong buys and only one hold.

Delta Remains Dependent on the Fed

As a near-term wager, the bulls likely have momentum regarding investments like DAL stock. While layoffs have increased in scope recently, this dynamic also suggests that the Federal Reserve may relax its hawkish monetary policy in the future. If so, this subsequent action might undergird consumer sentiment.

However, the longer-term framework for DAL stock is very much questionable. Recently, a Fed official suggested that substantial rate hikes may be needed to get inflation under control. If so, the bump up in Delta and other travel-related businesses may be temporary. Unfortunately, higher rates from here will likely slow commerce substantially, accelerating the current job cuts.

What’s more, a global recession may materialize, particularly with several central banks mimicking the Fed’s hawkish strategy. If a slowdown occurs, DAL stock would face severe pressure. Following the Great Recession, air carriers cut routes – particularly short-haul flights – leading to significant double-digit losses. And with the personal saving rate down to worrying lows, long-haul flights will probably suffer disruption under another global recession.

Ultimately, then, investors interested in chasing DAL stock for profits should think only in a short-term context. Longer term, the narrative unfortunately features many ambiguities.

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