The start of the week was rough for airlines and aviation companies across the board. We saw a lot of sharp price action in the pre-market session early morning on Monday after the news of an Oil Refinery in the middle east being attacked.
The attacked on the Saudi Oil refinery damaged about 50% of their output and we saw price shoot up over the weekend for the barrel of oil.
Fuel is one of the largest costs associated with the airline industry. The cost of fuel rising 10% a barrel overnight directly affects the revenue that can be made on the airlines side.
Commercial Airlines such as American, Delta, JetBlue, Azul, Gol, and Alaska all experienced quick sell offs in the market. These commercial airlines have sold their tickets to the flying public weeks sometimes months in advance. They sell these tickets based on estimated prices of fuel to cover costs.
If the price of fuel climbs overnight then the airline must take the expense of the increased fuel price. This is part of the reason behind why we saw all the airlines across the board open the week to the downside.
As the dust in the rubble settles from the attacks on the oil refinery we see President Trump releasing more oil reserves into the market and Saudi officials announcing they will be taking action towards quickly recovering from the tragic events. Aims of optimism helped balance fuel prices and control them from continuing to climb higher.
American Airlines (AAL)
American Airlines has a massive sell of yesterday from the market. Put options to be able to sell the stock at the $30 strike price sky rocket up as we see price drop down a total of 7.28% in just one day. This kind of rejection is not common with American Airlines stock.
Few investors have been saying that the spike down happened all too quickly. Overall sentiment and perspective on these legacy carriers remains strong as they are the backbone to our transportation network domestically in the United States.
Based on the current chart using the MACD indicator we have been in the over bought range for quite some time now. The curve of the trailing momentum is beginning to turn hawkish and it was unable to break past over the .5 level. With a weakening MACD many technicians would be looking for price to continue to respect the downtrend.
Often time when we are holding on to stocks that we are aiming for growth in the long term there are period where the stock drops in price on a short term basis. Many investors look at these movements as pull-backs or retracements on the overall projected move.
Pullbacks or retracements can occur in both downtrend and up trending markets. Investors see pullbacks as a sign of a reversal and decide to enter in a trade against the major trend. This strategy is extremely risky and the overall major trend has greater strength over the smaller time frame trends.
Let’s look at an options strategy that can be used in coordination with a long stock position that can be used to be able to generate some additional income.
Selling covered calls on stocks that you already own can provide for an additional source of income on stocks that you already currently own. Let’s take a look at American Airlines and go over a quick example of a covered call based on the current price for the day.
When selling a covered call on a stock you are selling the right for someone else to purchase your shares at a specific price. We are going to pick a strike price that is above the current stock price.
Disclaimer: Example is for demonstration purposes and is not intended to be used as financial advise.
At the start of the day on Tuesday we see American pushing to regain some value in the early hours. We are going to look to sell the Weekly Call with the $30 strike price. The current trading price for this option is $.20 a share.
If we currently are holding only 100 shares of American we can sell one option for an addition $20 in our account. This is additional income aside from the value of the shares themselves. If price continues to test within this price range and move sideways and we never get assigned on the option we keep the option premium.
If price pops up and goes up towards $30 we can be assigned on the option. This is a great thing because now we can profit on the premium of the option and also the rise of the stock value.
If for whatever reason the price of the stock continues to drop short term we gain the income of the option and we still are holding on to the stock that we are looking bullish long term on.
Selling covered calls on stocks you already own offer a potential for generating additional income on long term stock positions. Keep in mind there are risk involved with trading options.
It important to understand the possibility of being assigned on the option contract. Ensuring that the shares are available in the event that you are assigned the option is essential to prevent there from being outstanding risks on the trade.
So this week we are going to keep a bit defensive as the market is still unsure of its direction. Many investors have great optimism towards the trade talks. Although we can be easily swayed with the tweets of our president unless we have contracts signed there will be uncertainity in the market.
This week we are also looking for potential rate cuts in the U.S. which is also keeping many investors at the edge of their seats. These are two key elements that can play a major role in the current market conditions.
Keeping tight stop losses and securing profits when possible is going to be essential when trading these choppy conditions.
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