Bracing For a Hard Landing

While airlines have seen an influx in bull volume over the past few months, largely due to traders using them as a proxy for falling jet fuel prices, sellers have come in as of late at key resistance levels. Delta Airlines DAL and AMR Corp. AMR are the offenders in question. A look at the chart of each will show that the stock made a hard, short-covering bounce in May, followed by a decline, and then a smaller bounce recently. During the most recent bounce, both stocks found major selling pressure at the 50-day moving averages. Delta Airlines and AMR Corp. are now both moving lower in a hurry. While AMR and DAL have two support levels below them ($5.51/5.45 and $9.09/8.91, respectively), those are very week support levels, ones that could easily be broken and lead to dramatically lower stock prices. In the case of Delta Airlines, the next major support level comes into play at $7.45-6.90. AMR Corp. will not see support until $5.13-4.92. With AMR Corp. still operating with a yearly loss and valuation quite stretched in Delta Airlines (>1.5 PEG), it is hard to make the case that these names should not fall. So…how to play it? For DAL, one way to play the downside would be to buy the September $10/9 collar (short call, long put) for a net debit of $0.05. In the case of AMR, the November $6 put can be purchased for $0.94 and the November $7/4 strangle sold for a credit of $0.49 for a total net debit of $0.45. AMR Corporation operates in the airline industry. The company's principal subsidiary is American Airlines, Inc. As of December 31, 2010, American provided scheduled jet service to approximately 160 destinations throughout North America, the Caribbean, Latin America, Europe and Asia. Delta Air Lines, Inc. provides scheduled air transportation for passengers and cargo throughout the United States and around the world. The company's route network gives it a presence in every domestic and international market.