Options Trader Looking for Volatility Spike in Key Airline

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Options Trader Looking for Volatility Spike in Key Airline

Someone thinks activity is going to get more interesting in the world’s biggest airline.

Options activity spiked in American Airlines (AAL) yesterday, with one transaction accounting for more than half the volume. Here’s what happened in a single second during the final hour:

  • 38,000 August 32 puts were bought for $1.33 and $1.34.
  • 38,000 August 33 calls were bought for $1.54.
  • That translated into a cost of $2.875 per share.

Calls fix the price where a stock can be purchased, so they tend to make money when shares rally. Puts are just the opposite, profiting to the downside. Why would someone spend so much money for both?

The answer is that he or she probably thinks AAL will start moving more aggressively in either direction. The stock would have to rise or fell more than $2.875 for the position to be profitable.

The trader also may expect implied volatility, a key ingredient in options pricing, to increase. The strategy, known as a long strangle, is a common technique to play higher volatility. (See our Knowledge Center for more.)

 American Airlines (AAL) chart with trendline, 50-day moving average and implied volatility.
American Airlines (AAL) chart with trendline, 50-day moving average and implied volatility.

AAL rose 0.83 percent to $32.88 yesterday. It’s gone pretty much nowhere all of 2019 amid worries about fare pressure. However, last month the industry showed signs of a turnaround.

Some chart watchers may also see the potential for AAL to start moving if it breaks a downward-sloping trendline that’s held it in check since February.

In conclusion, AAL has been pretty boring all year. But now someone is looking for the company to start moving again.

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