Major U.S. carrier American Airlines (AAL) slid 15% earlier this week, amid a warning on earnings. One trader sees a further slide over the next six months.
That’s based on the November $8 puts. With 168 days until expiration, 47,299 contracts traded compared to a prior open interest of 433, for a massive 109-fold rise in volume on the trade. The buyer of the puts paid $0.18 to make the bearish bet.
American Airlines shares recently traded for over $11.50. Shares would need to decline by $3.50, or about 30% for the option to move in-the-money.
The strike price is well under American Airline’s 52-week low of $10.86 per share.
Although passenger traffic is up and energy prices haven’t soared, the company cut its latest quarterly guidance, citing demand. Even with beneficial factors at play, American Airlines only saw revenues rise 3% in the past year, and profitability has been elusive.
Action to take: American Airlines shares are in a downtrend, so interested investors should stand aside for now. Shares will likely retest their recent low, and could end up bouncing from there.
For traders, the November $8 puts play well to the current downtrend. The options are inexpensive enough to see high-double-digit, if not triple-digit returns on a further drop lower. But look for the 52-week low area as a sign of potential strength and reversal for shares.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.