A Cheap Call Option Strategy on US Airways - updated 8/14/13

4/13/13:  As you know US Airways (LCC) is in the process of closing the acquisition of American Airlines in the coming months.  There are hundreds of millions of dollars of cost savings and synergies to be gained by combining the two airlines, and so far CEO Doug Parker has a great track record of running airlines from America West to US Airways.  He will run the largest airline in the world with this acquisition, and we see room for significant upside from where the stock is today at $16.05.

Another positive for the airline industry is that oil prices have been falling, and trading in the $85-100 range.  You can pick up stock in LCC for relatively cheap at $16/share right now, but we like this option play much better.

Today we sold a Jan 2015 $15 Put for $3.70, and we bought a Jan 2015 $15 Call for $3.75.  This trade cost us $5 per pair of put+call, and we have long exposure to LCC for almost free.  We have 20 months before expiration to see how this trade plays out, and as of right now we are planning to keep this position on at least through 2013.  The ideal scenario is that the stock moves higher and trades above the $19.50 range so that we can lock in gains by appreciation in the calls, and time decay and depreciation in the puts.  

If LCC drops below $11.30, we will likely get put the stock and have to buy 100 shares at $15 for each put that we are short.  

This is a great strategy where we can gain exposure to a long position on a stock without having to buy it.  We'll update readers periodically on this position and our outlook on it since we may hold it over a long time horizon.

Update on 6/18/13:  We are still in this position and feel comfortable with how it is playing out.  We have a small gain right now, however if LCC continues to bounce off of the 50 day moving average then this trade should reward us very well.  No major sign of weakness as of now.

Update on 8/13/13: Well the DOJ announcement to sue US Airlines and block the merger with American pounded LCC pretty good today.  We sold the Jan $15 Calls for $4.30 and booked a 15% gain on the calls.  We were up 60% as of yesterday before the announcement, but this came as surprise and we'd rather be out of the call than risk losing our profits all together.  We are still hanging on to the short put position for now, which is up 25% as of today.

Updated on 8/14/13:  We bought back the Jan 2015 $15 Puts for $3.05 just now, for a 17.6% profit.  This trade has lost a lot of its gains over the past few days with the DOJ announcement, but as we stated some profit is better than no profit.  Also -- note that this is how we manage risk, we're not going to gamble on this position right now considering there is more headline risk if US Airways isn't going to be successful in pushing the merger through.  Not worth betting on a coin-toss right now, so we're locking in our gains and looking for other trades.