Income trade on Southwest Airlines

March 17, 2023 - 10:18 am

Shares of Southwest Airlines (LUV) have dropped along with the airline sector and the market over recent weeks.  Shares of LUV had already been weak from their operational challenges over the holidays in late 2022, and into early 2023, but current trading sessions have brought the stock to fresh 52-week lows.  We see the selling as being overdone, however considering the fragile market conditions right now, there's certainly a plausible scenario that pushes the share price even lower. 

 

 

Trading at under $30 right now, we are selling the May 2023 $22.50 Puts on LUV for $0.27 cents.  This is a low risk trade as we don't see shares dropping close to $22.50, and before expiration there's less than a 8% probability that this happens considering the volatitlity on LUV shares.  While $0.27 cents doesn't seem like a lot, it's a net 1.2% return on full margin requirements in a 63 day period, which is 6.95% annualized and beats treasuries, most high grade corp bonds and money market accounts with short term liquidity.