Shares of United Continetnal Holdings Inc. ($UAL), American Airlines ($AAL) and Southwest Airlines Co ($LUV) are all lower by 2% this morning as CNBC is reporting that several flights were threatened midflight. As I write, all of these flights have touched down, but shares of airlines were headed lower as we head into the open blue skies of US equities.
In other news, Homeland Security Secretary Jeh Johnson on Monday reassigned the leader of the Transportation Security Administration and directed the agency to revise airport security procedures, retrain officers and retest screening equipment in airports across the country. The TSA's acting administrator, Melvin Carraway, is being reassigned to a different job in the Department of Homeland Security. Acting Deputy Director Mark Hatfield will lead the agency until a new administrator is appointed.
The combination of this negative news pressured all airline stocks lower. The lowering action has continued in 2015, with most shares below January levels. They alsotechnically look like they intend to give back any fuel discount they have carried over the last few quarters, a retest of 2014 lows seems imminent here. As news of heightened security and consumer fear surface, people will simply stop flying and begin driving, and the airline sector will take it on the chin. Of course, understand that without the US government bailing out airlines after 9/11, they would have all gone bankrupt.
Heavy Buying of Airline Stocks Raises Eyebrows
Yesterday, option volatility in the sector was up, but it wasn’t a case of expanded Put buying, it was Call buying by large institutions. In a late report, an analyst from Option Monster wrote “Our Heat Seeker tracking program detected heavy call buying in American Airlines, Delta Air Lines Inc. ($DAL), Southwest, and United Continental. Volume was more than triple average amounts in all four, with upside contracts dominating trading across the board.”
“AAL's Weekly 44s expiring this Friday, June 5, led the charge. Turnover of 15,000 was more than twice the previous open interest in the strike, and premiums rose from as low as $0.25 early in the morning to as high as $1.08.” Whatever portfolio manager bought these Calls is wondering today what in the hell he was thinking, as these are likely to be worthless when they expire. These complicated trades are intended to be short term plays for a few days, but clearly, this morning’s events were not expected.
Airlines in general are difficult to trade, and they have become a proxy for oil prices. Today though, with news of terrorists threatening flights, the consumer will react the same way they did after 9/11 – they simply will not fly. Travelers will find other ways to travel, and airline stocks could tumble to yearly lows.
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