Selling options (puts or calls) against American Airlines is the same thing—the same low risk—as being on the house side of a bet.
That’s certainly not a bad place to be.
Here’s how to make it happen…
American Airlines (NASDAQ:AAL) reported data showing passenger miles are up and revenue per mile is down.
Wall Street liked the news, then did not like it.
Who cares? Day traders buying calls and puts on American.
That is why YOU should care. Sell them those puts and sell them those calls.
If the suckers want to bet against the house, take their money.
Why is selling options against American (puts or calls) the same thing—the same low risk—as being on the house side of a bet?
- American continues to have expanding operating margins due to the merger with US Airways and falling jet fuel prices.
- The key to an airline’s profitability over the long haul is passenger miles. They eventually catch up with capacity, which in turn means higher revenue per passenger mile, assuming the industry doesn’t add too much new capacity.
- The industry did add a lot of capacity at American’s big hub in Dallas—both Southwest Airlines (NYSE:LUV) and Virgin America (NASDAQ:VA) added flights. The impact of these additions was felt, but is behind the company and should be behind the stock very soon.
- The P/E for the stock is 6.35 (trailing P/E) and the forward is 7.5 according to consensus estimates. It is 5 according to my estimates—yes, I disagree that strongly with Wall Street’s view. The historical multiple for the industry is around 7, and that’s rising. The stock has more room for rapid appreciation than any of the four big airlines, the other three being Delta (NYSE:DAL) and Southwest.
Why do I focus of selling options when looking at American?
- The stock has weekly and monthly options. You can sell puts or calls against the stock 52 times a year.
- If you sold a weekly put a couple of strikes out of the money in the middle of the week, your annualized rate of return would be 47%. That’s a little less than one percent in 2.5 trading days, multiplied by 52. This is the way we think when putting on trades in my Options Income Blueprint service.
- If you own shares and sell calls a strike or two above the current share price, you get the same impact, which increases if you’re called out.
This approach doesn’t start with those premiums—it starts with the company, then the movement and support for the stock, then the option sale possibilities.
Think about it.
Michael Shulman owns AAL shares.