Airlines are ripe for picking

Major US airline carriers are off of their 2019 highs from the recent September rout in the market. A perfect storm and quadruple whammy from the pullback in the market, rising oil prices from the Saudi oilfield attacks and continued slowing global growth have pummeled the stocks, especially the carriers who have grounded 737 Max planes. We see this pullback as a great opportunity to enter into a name that we're not fond of from an execution perspective, but the stock is too attractive to ignore. American Airlines (AAL) in the $25 range should present good room to the upside barring major industry or execution risks. The headwinds beyond the ones mentioned above are the mechanics union issues they still face, rising oil prices and a recession where business travel slows down.

We are buying the Feb 2020 $27 Calls for $2.00 even and selling the same expiration $24 Puts for $1.77, the net cost on this trade is $0.23 for strong upside exposure on the stock for the next 140 days.

If the stock drops below $22.23, we'd either buy back the puts for a loss or take delivery of the stock depending on market conditions. We'll keep you posted well in advance of that should that materialize. This should be a great trade, and it's nice to know that Warren Buffet's Berkshire Hathaway still maintains 10% ownership in AAL at a 7x PE multiple today.