Option Traders Make Big Bets On American Airlines

American Airlines Group Inc AAL shares lost 2.73% Wednesday and are now down 68.2% year-to-date in the wake of the coronavirus outbreak. 

On Wednesday, the largest of a series of American option trades were more bullish than bearish, suggesting smart money is buying the dip. 

The Trades

On Wednesday, Benzinga Pro subscribers received 21 option alerts related to unusually large trades of American Airlines options. Here are a handful of the biggest:

• At 10:04 a.m., a trader sold 5,055 American put options with a $3 strike price expiring in January 2022 at the bid price of $1.541. The trade represented a $778,975 bullish bet.
• At 10:15 a.m., a trader sold another 5,055 American put options with a $3 strike price expiring in January 2022 at the bid price of $1.541. The trade represented another $778,975 bullish bet.
• At 10:48 a.m., a trader bought 1,922 American put options with a $13 strike price expiring on Nov. 20 near the ask price at $6.151. The trade represented a $1.18-million bearish bet.
• At 12:22 p.m., a trader sold 14,230 American put options with a $7 strike price expiring on Jan. 15, 2021 below the bid price at $2.678. The trade represented a $3.81-million bullish bet.

Of the 21 total large American option trades on Wednesday morning, eight were calls purchased at or near the ask or puts sold at or near the bid, trades typically seen as bullish. The other 13 trades represented calls sold at or near the bid or puts purchased at or near the ask, trades typically seen as bearish.

Three of the four largest trades of the morning were bullish.

What It Means For American Airlines Investors

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 larger 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 size of the largest American trades, it’s possible that at least some of the trades were institutions hedging against large positions in American stock.

Airline Turbulence

Airline stocks have been hammered this year as Americans hunker down and cancel travel plans due to the pandemic. Selling pressure ramped up this week after Warren Buffett revealed Berkshire Hathaway, Inc (NYSE: BRK-A) (NYSE: BRK-B) had liquidated its roughly 10% stakes in American and each of the other “big four” U.S. airline stocks.

On Wednesday, a lobbying group representing airlines petitioned the government to reduce minimum flight requirements until demand starts to pick back up. The minimums are part of the terms of an airline bailout deal that includes $25 billion in federal payroll grants and loans.

“The cost associated with operating nearly empty flights to communities with little to no demand significantly exacerbates air carrier liquidity,” lobbying group Airlines for America said Wednesday.

Bullish sentiment among StockTwits messages mentioning American is up from 25% on Feb. 20 to 64.3% on Wednesday.

Benzinga’s Take

The two $3 put sales early in the morning appear to be a trader bailing on a speculative bankruptcy bet given the break-even price of the calls was just $1.46. For now, the major airlines appear to have enough liquidity to navigate the catastrophic collapse in airline demand, but it remains to be seen how quickly and how much the industry recovers.

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

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