Huge Option Trades In Delta Air Lines On News Of Buffett Buying, Travel Concerns

Delta Air Lines, Inc. DAL shares are down 20% year-do-date on fears that the global coronavirus outbreak will grind international air travel to a halt.

While some investors see the outbreak as a major red flag for airline stocks, others see the recent dip as a long-term investing opportunity. Regardless, Delta certainly had the attention of some large option traders on Wednesday.

The Trades

On Wednesday, Benzinga Pro subscribers received seven option alerts related to unusually large Delta option trades. Here are some of the largest:

• At 10:40 a.m. ET, a trader sold 3,000 Delta put options with a $52.50 strike price expiring on June 19. The contracts were sold at the bid price of $8.651 and represented a $2.95 million bullish bet.
• At 11:03 a.m. ET, a trader sold 926 Delta put options with a $40 strike price expiring on March 20. The contracts were sold near the bid price at 79.6 cents and represented a $73,709 bullish bet.
• At 11:04 a.m. ET, a trader sold 5,980 Delta put options with a $52.50 strike price expiring on June 19. The contracts were sold below the bid price at $8.651 and represented a $5.17 million bullish bet.
• At 1:51 a.m. ET, a trader sold 526 Delta call options with a $60 strike price expiring on Jan. 15, 2021. The contracts were sold near the bid price at $2.969 and represented a $141,809 bearish bet.

Of the seven total large Delta option trades on Tuesday morning, five trades were puts sold at or near the bid, trades typically seen as bullish. One trade was calls sold near the bid, a trade typically seen as bearish. One trade took place at the spread midpoint, a price typically considered neutral.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader. Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their large stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively large sizes of the two largest Delta option trades, there’s certainly a possibility they represent institutional hedging.

Delta Cleared For Takeoff?

Delta and other airline stocks have taken big hits since the coronavirus outbreak began, and analysts say there’s no question the health concern will impact near-term numbers. However, assuming the coronavirus outbreak eventually dies down, the February dip could be a major opportunity for investors to get some great value in the space.

During the SARS outbreak in 2003, U.S. airline revenues over the Pacific dropped by 40% in the second quarter, and the coronavirus could have similar negative impacts on U.S. domestic flying as well given there are already dozens of reported cases in the U.S. Bank of America analyst Andrew Didora recently said pricing could be a big overhang for airline stocks thanks to the coronavirus.

“The near term risk to the industry could be to domestic pricing, not from coronavirus concerns, but from increased domestic capacity as the airlines redeploy international widebodies onto domestic routes,” he said.

Fortunately for Delta, investing legend Warren Buffett has been adding to his position in the dip.

According to the latest filing by Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), Buffett’s company recently added more than 976,000 shares of Delta, a $45.3 million investment at an average price of $46.40 per share. Berkshire’s total stake in Delta now stands at 71.9 million shares.

Bullish sentiment among StockTwits messages mentioning Delta plummeted from a peak of 100% on Feb. 15 a six-month low of 34.6% on Tuesday.

Benzinga’s Take

The two biggest trades on Wednesday were June put sales, which could represent hedges against a short position or a former bear throwing in the towel on a coronavirus short trade. Regardless of what happens in the option market in the next couple of days, long-term investors would be wise to carefully consider emulating anything Warren Buffett does with his money.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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