What Could Heavy Options Activity in United Airlines (UAUA) Mean for You?
All 13 stocks in the NYSE airline index were trading higher this week, making it a good time for anyone with long investment positions in an airline. UAL Corporation (United Airlines – NYSE: UAUA) was the top performer early on.
This does not seem to be because oil was moving lower, which sometimes is a catalyst for higher airline prices, but rather due to rumors of consolidation (mergers and acquisition) in the sector. Sometimes, markets can move with no change in fundamentals or actual concrete news.
Rumors of an acquisition have the potential to send a stock or group of stocks sharply higher.
Options Action in UAUA
Earlier this week, a trader bought 11,000 of the June 24 call /16 put strangle, for a cost of $1.85. On the surface, this looks to be a huge trade with a somewhat neutral stance. However, this could also be a big bet on either volatility or direction.
With the stock at $22.67, the trade itself has a long delta bias of .38 per spread, which means it will become profitable faster if the stock rises. The trade is also long 5.58 Vega per spread, which means that for every absolute implied volatility move that UAUA options make, this spread will increase by $5.58, multiply that times 11,000 spreads, and you could have quite a bit of money. The risk that this trader is assuming is the entire $1.85 that he or she paid for the spread itself. Also remember that when you buy a straddle or strangle in this case, you are buying a call and a put, both of which are decaying assets. If the stock does NOT move above 24 or below 16, this trader could lose their entire investment.
I think the real bias/bet this trader is making is that UAUA will move higher. I say this because the trader gave the call a much higher delta. Also, when stocks rise, volatility tends to play a role (upside calls especially), unless of course that stock may be the target of an acquisition and turns the call skew really positive. Regardless, it is important to dissect these trades and learn a little more about the subtleties that may lurk inside them. Don’t forget, this trader could also have another position open with a completely different risk profile and just because someone makes a bet on a huge directional move in a stock, it does not mean that move will come to fruition.
Plans to Bet on UAUA?
What do you think this activity means? Are you planning to make a move on the rumors in UAUA or any of the other airlines? Please feel free to share your trade ideas and other observations in the comments.
If you’re into options trading, check out the rates at OptionsHouse for stock options, or if you’re just getting started, practice risk-free in a virtual trading account.
Photo Credit: JoshuaDavisPhotography.COM
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