Yahoo Finance Go Long United Continental Holdings Inc (UAL) Stock Despite Market Turbulence
This week has been filled with headlines that shook up markets. This was especially true for the airlines. We are expecting a new giant storm, Irma, to hit the East Coast and the news has caused a bloodbath in airline stocks. United Continental Holdings Inc (NYSE:UAL), for example, fell 4% at the Wednesday open but I was happy to see it close only down 1.3%.
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UAL stock has not had a good summer. Since the middle of July it has fallen 25%. The slide started on a decent earnings report. Luckily it came into the event with a huge head of steam, which leaves it still up almost 11% over 12 months.
Just before that, consensus on Wall Street was that airlines had shed their bad business habits.
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I remained skeptical, and it didn’t take long before they were hit with a slew of embarrassing headlines and videos. Wall Street’s love for UAL waned. So fundamentally they are challenged but this is not to say that they are doomed. There is value and therein lies my thesis.
I bet that there is a bottom to this slide and I am willing to risk owning UAL shares, especially if it’s a deeper discount from here. Currently UAL has a trailing price-to-earnings ratio of 8 and with a price-to-book of 2 I don’t mind owning it at an even deeper discount.
Technically, most of the recent slide was a measured move once it lost $70 per share.
From here, the easy money for bears is already done. UAL stock now enters a pivotal zone that dates back to 2014, which should provide some support. So the bears will need new reason or more incremental conviction to sell.
This usually causes a stall in the price action, which I will use to create income out of thin air. The idea is to sell risk against downside fears that are not likely to occur, then let time do the work. I get elevated premiums while investors hate the sector.
UAL Stock Trade Idea
The Bet: Sell the UAL Dec $50 put and collect $1 per contract to open. This is a bullish trade with an 85% theoretical chance that the price will stay above my strike. Otherwise, I own the shares and would accrue losses below $49.
I can mitigate the risk of selling naked puts by using credit spreads instead.
The Alternate Bet: Sell UAL Dec $50/$45 bull put spread where I have about the same odds of winning but with smaller dollars at risk. If successful this spread would yield 10%.
Compare that with risking $60 to buy the shares out right and without any room for error expect a rally to profit.
Since there are no guarantees when investing in the stock markets, I never bet more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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