Delta Air Lines, Inc. (NYSE: DAL) shares are down 20% from the previous year for fears that the global coronavirus epidemic may stop international air travel.
While some investors see the epidemic as a big red flag for airline stocks, others see the recent decline as a long-term investment opportunity. Regardless, Delta certainly attracted the attention of some great option traders on Wednesday.
Wednesday, Benzinga Pro subscribers received seven option notices related to unusually large Delta option exchanges. Here are some of the biggest ones:
- At 10:40 am ET, a trader sold 3,000 Delta put options with an exercise price of $ 52.50 expiring on June 19. The contracts were sold at the offer price of $ 8.651 and represented a bullish bet of $ 2.95 million.
- At 11:03 am ET, a trader sold 926 Delta put options with an exercise price of $ 40 expiring on March 20. The contracts were sold close to the offer price at 79.6 cents and represented a bullish bet of $ 73.709.
- At 11:04 am ET, a trader sold 5,980 Delta put options with an exercise price of $ 52.50 expiring on June 19. The contracts were sold below the offer price at $ 8.651 and represented a bullish bet of $ 5.17 million.
- At 1:51 am, a trader sold 526 Delta call options with an exercise price of $ 60 expiring on January 15, 2021. The contracts were sold close to the offer price at $ 2.969 and represented a bearish bet of $ 141,809.
Of the seven large-scale Delta option trades on Tuesday morning, five trades were sold at or near the offer, transactions generally considered bullish. A trade was represented by calls sold close to the offer, a trade generally seen as bearish. A trade took place at the midpoint of spread, a price generally considered neutral.
Because it’s important
Traders who stick only to stocks often also closely monitor the activity of the options market for unusually large transactions. Given the relative complexity of the options market, large option traders are generally considered to be more sophisticated than the average trader. Many of these large option traders are wealthy individuals or institutions who may have unique information or theses relating to the underlying stock.
Unfortunately, stock traders often use the options market to protect themselves from their large equity positions, and there is no foolproof way to determine if an options trade is an autonomous position or a hedge. In this case, given the relatively large size of the two largest Delta option trades, there is certainly a possibility that they represent institutional hedging.
Delta authorized for takeoff?
Delta and other airline stocks have had great success since the coronavirus epidemic began, and analysts say there is no doubt that health concern will impact short-term numbers. However, assuming the coronavirus epidemic eventually dies, the February drop could be a great opportunity for investors to get great value in space.
During the SARS epidemic in 2003, U.S. airline revenues to the Pacific declined 40% in the second quarter and coronavirus could have similar adverse effects on U.S. domestic flights and as there are already dozens of cases reported in the Bank of America of the United States analyst Andrew Didora recently said that prices could be a big jump for airline stocks thanks to the coronavirus.
“The short-term risk to the sector could be due to domestic prices, not due to coronavirus concerns, but to the increase in domestic capacity as airlines redistribute international bodies on domestic routes,” he said.
Fortunately for Delta, investment legend Warren Buffett added to his dive position.
According to the latest filing of Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B), Buffett’s company recently added over 976,000 Delta shares, an investment of $ 45.3 million at an average price of $ 46.40 per share. Berkshire’s total stake in the Delta now amounts to 71.9 million shares.
The bullish sentiment among StockTwits’ posts mentioning Delta plummeted from a 100% peak on February 15th, a six-month low of 34.6% on Tuesday.
Wednesday’s two main operations were June put sales, which could represent hedges against a short position or an ex-bear who throws in the towel on a short trade coronavirus. Regardless of what happens in the options market over the next two days, long-term investors would be wise to consider carefully emulating anything Warren Buffett does with his money.
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