A couple of things jumped out at me as I was researching Delta and its impending earnings release. The first thing that stood out was the trend channel that has dictated trading over the last four months.
After experiencing a tremendous run over the last few years, and especially as the price of oil has fallen, the stock has been in a downward sloped trend channel for the last three or four months.
Looking at the weekly chart we see the upper rail of the trend channel, but we also see potential support around the $41 level, as well as the 52-week moving average. In addition, the stock is oversold based on the weekly slow stochastic readings.
Because of the mixed signals from the daily chart and the weekly chart, I turned to the sentiment analysis to see if there was anything that stood out. What I learned is that investors and analysts alike are very bullish toward Delta. The short interest ratio is a meager 1.5 and the put/call ratio is currently lower than 92% of the readings for the past year.
The analyst ratings show 17 “buy” ratings, one “hold” rating and not a single “sell” rating. The score on my proprietary sentiment composite reading came in at 2.36, and that is the second lowest (most bullish) reading I have seen in the two years since I developed the composite.
Because of the extreme bullish sentiment toward Delta, I am leaning toward a bearish outlook, but there are some bullish indications from the weekly chart. As a result, I think the best play ahead of earnings is with Delta Air Lines options – specifically, a strangle.
A strangle is an options trade where you buy both a put and a call with the same expiration date, but they do not have the same strike price like a straddle. In this case, I think the best bet is a May 43 strike put at $1.77 and a May 44 strike call at $2.00. This gives you a total investment of $3.77, which means the stock has to move higher than $47.77 or lower than $39.23 for this trade to be profitable come May 15.
With the earnings announcement coming up and the increase in volatility that is likely, the stock should be able to make a strong move in one direction or the other. With the trendline moving down and the 52-week moving average rising, a break above the trendline or below the moving average would likely lead to a bigger move in the prevailing direction, which would help this strangle. If you look at the daily chart, the orange lines represent the prices on the high side and the low side where this trade becomes profitable.
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