Option Trade to Capture Upside at US Airways

aplus's picture

We had a bullish option position on US Airways (LCC) earlier this year and made roughly 32% on that position in 4 months.  We exited that position because of the DOJ suit against the merger, and it looks like all parties are working towards a solution to avoid going through the court.  Whether this happens or not, there is a strong willingness on the part of the two airlines to do what it takes to get the deal done.  This will create the world's largest airline, and both companies trade at a P/E of roughly 8.  The airline sector is in a bull market right now due to low gas prices, and a recovering global economy -- and we see this trend continuing for the sector.

We like the bullish case on LCC, and we are selling the June 2014 $23 Puts for $3.25, and buying the June 2014 $22 Calls for $3.65.  This trade will cost us a net of $40 per set of options, and we are at risk of buying the stock if it drops below $19.75 at an effective price of $19.75.  Another alternative is to buy the stock directly, which can work great in this case but this option play lets you save some capital for other trades.

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