Grab This Brazen Bullish Opportunity in Hard-Hit American Airlines Stock Now

American Airlines (AAL) is a stinker of a security, let’s just be brutally honest about that. Sure, there’s the matter of AAL stock losing nearly 21% on a year-to-date basis, which is not a flattering statistic. However, when you look at the five-year chart, the loss of 45% truly wakes people up to the reality of the situation. For added emphasis, AAL has incurred a 64% Sell rating from the Barchart Technical Opinion rating.

Moreover, with a 60-month beta of 1.25, it’s noticeably more volatile than the benchmark S&P 500 index. Part of the wildness can be attributed to major U.S. carriers — including American — abandoning the practice of actively hedging against fuel costs many years ago. Unfortunately, this decision means that a prolonged Iran conflict could take a huge bite out of profits.

Obviously, such a notion isn’t helpful when discussing the bullish case for AAL stock. But on the flipside, American would have an advantage over competitors who do hedge if the conflict ends sooner than is expected. Circumstances don’t look great on the geopolitical front, if I’m being honest. However, there is hope that diplomacy can still win out.

It’s fair to point out that, amid the Trump administration’s recent controversies, no world leader — no matter how popular — can afford to be completely disjointed from the many pragmatic issues plaguing their constituents. As such, it wouldn’t be completely unreasonable to believe AAL stock could make a comeback, if only temporarily.

A great example is the report that United Airlines (UAL) may be considering a possible merger between the two carriers. One of the hidden underlying themes of this news item is that, with AAL stock being beaten down so badly, much of the ugliness may already be priced in. Because of this dynamic, any bit of good news would likely have a disproportionate impact on the security.

No, it’s not a wholehearted justification for buying American but this endeavor is not merely a Hail Mary pass.

Using Inductive Math to Plot a Path Forward for AAL Stock

Here’s another truth bomb: American Airlines stock has not proven itself to be a reliable trade for debit-side bulls. Again, that shouldn’t be a surprise given the aforementioned five-year loss of 45%. However, when we drill down into the ground floor, we see that AAL suffers from a negative bias.

Using a dataset from January 2019, the stock’s forward 10-week distribution is both narrow and largely incurs a negative expectancy ratio. In other words, when you hold AAL stock over a random 10-week period, the expected average range of outcomes is quite thin. Assuming an anchor at the current stock price, over the next 10 weeks, we would expect (on average) AAL to land between $11.90 and $12.20.

What’s more problematic, the bulk of this forward distribution sits below the current spot of $12.13. By my calculations, the exceedance ratio is only 47.6% — if you bought AAL a hundred times, you’d expect only 48 of those transactions to break above spot.

That sounds bad and it is. However, we’re not trying to trade AAL stock in the aggregate. Instead, we’re specifically conditioning the analysis on the security’s current behavioral state. What makes this situation distinct from the aggregate is that, in the past 10 weeks, AAL stock has only printed four up weeks, leading to an overall downward slope.

While that’s ordinarily a bearish signal, historical data (going back to January 2019) reveals that extended pessimism in AAL stock tends to trigger bullish sentiment over the next 10 weeks. Under this conditioned signal, we would expect the forward distribution to shift from the aggregate expectation, with AAL projected to land between $11.80 and $13.

This practice of pattern recognition is known as induction. I’ll be the first to admit that it’s not a perfect methodology. Just because you see a thousand white swans does not mean all swans are white. However, in a variable field like the equities market, a quantitative inductive model is arguably the most effective means of anticipating what the future may hold.

Putting Theory into Practice

Now, for the ultimate reality check: inductive models don’t amount to much if we can’t formulate a specific trading idea. For American Airlines stock, I’m looking at the 11/14 bull call spread expiring June 18. This trade involves buying the $11 call and selling the $14 call simultaneously on a single execution. We’re looking for AAL to rise through the $14 strike at expiration. If so, the maximum payout comes out to nearly 110%.

I acknowledge that the $14 second-leg target is outside the aforementioned forecasted range of $11.80 and $13. However, playing AAL stock a little bit by ear at this juncture may make sense. With earnings coming up on April 23, a positive print could potentially do wonders for upside sentiment. Further, AAL has incurred severe volatility since December of last year. As stated earlier, with so much bad news baked in, some positives could catapult the stock.

From an inductive angle, the breakeven price of the 11/14 bull spread sits at $12.43. That’s right around where probability mass would be expected to peak under the aforementioned quantitative condition. With all these factors in mind, enhanced aggression could be justified.