Options Action Takes Off in U.S. Airways (LCC), AMR Corp. (AMR)

Airline stocks were active on the OptionsHouse Hotlist today, perhaps due to a big merger announcement in the sector. Southwest Airlines LUV announced plans to acquire AirTran Holdings AAI for $7.69 per share, or about $1.4 billion overall in cash and stock. This is a premium of roughly 69% over AirTran's closing price on Friday.

The deal brings Southwest service to the Atlanta market will also reach destinations in the Caribbean and Mexico. It is expected to close during the first half of next year.

This merger news has the airline sector hot today with notable options action in two Southwest peers: AMR Corp. AMR, the parent of American Airlines, and US Airways Group LCC.

The former name saw almost 33,000 contracts trade on the November 7 call (which is out-of-the-money by about 50 cents). Open interest at this strike is 14,000, suggesting that at least some of today's volume is likely trading to open.

At 9:38 Eastern time, one block of 18,500 contracts traded for 45 cents each, going off between the bid and the ask price and making it tricky to discern whether the calls were being purchased or sold. If the aforementioned merger has other airline bulls buying calls today, they risk losing 100% of the premium paid but have unlimited upside potential above the breakeven price of $7.45. Sold calls have unlimited risk to the upside while reward is capped at the premium collected.

Elsewhere in the sector, the LCC November 10 call has been popular, with more than 20,000 contracts changing hands on open interest of just 666. This call, also out-of-the-money by roughly 50 cents, saw a block of 18,300 contracts trade out of the gate for 65 cents each.  This was near the ask price at the time, which suggests they were likely bought to open.

These call buyers will have unlimited profit potential at expiration if LCC is trading above $10.65. They risk the entire premium paid if the shares fail to rally.

LUV shares were up almost 9% on today's buyout news and its peers are following suit; AMR tacked on 1.1% while LCC is higher by nearly 3.5%. While encroaching Southwest presence could be seen as increased competition, investors seem to be taking the merger as a positive sign for the overall airline group.

Photo Credit: boeingdreamscape

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