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Bearish Bets Against Delta (DAL) Shine Spotlight on Unusual Options Activity

Barchart - Tue Sep 27, 9:00AM CDT
Travel & Leisure - isaac-struna-DiiPWPU6r4Y-unsplash

Representing an on-again, off-again framework, Delta Air Lines (DAL) has so far presented a vexing narrative for prospective stakeholders. During the initial onset of the COVID-19 pandemic, hardly anyone wanted to touch the airlines industry due to catastrophic losses of business. As society gradually returned to normal, DAL stock presented an intriguing contrarian idea. However, with a chaotic year so far in 2022, many traders decided to hit the exits.

Earlier this year, the main monetary and economic concerns centered on soaring consumer inflation. At the beginning of the COVID-19 crisis, members of the federal government came together to launch unprecedented monetary and fiscal stimulus, resulting in a meteoric rise in the real M2 money stock. Now, the Federal Reserve seeks to mitigate prior excesses through raising the benchmark interest rate.

Under the inflationary paradigm, DAL stock and its ilk presented a worrying narrative. In July of this year, I mentioned that the “labor market is likely to play the role of the ultimate arbiter for the travel industry.”

“At a basic level, people not only need wages but the confidence that those wages will continue paying out for them to take a risk with a pricey vacation. Unfortunately, with inflation taking a substantial bite out of the purchasing power of the dollar, it’s not clear how well the labor market will fare.”

Now that deflationary forces appear to represent the fundamental monetary framework moving forward, would DAL stock benefit? All other things being equal, it may play out that way. However, deflation also implies lower business activity, which in turn could still lead to the same layoffs that rampant inflation may have sparked.

Therefore, it’s not particularly surprising that DAL stock became the unwanted subject of unusual options activity.

DAL Stock Encounters Turbulence

When the closing bell rang out for the Friday, Sept. 23 session, pessimistic traders locked in on two transactions for Delta Air Lines, both representing put options. First, the market participants moved in on the $25 puts with an expiration date of Jan. 17, 2025. Second, they targeted the $28 puts with an expiration date of Sept. 30, 2022.

For the further expiry put, volume reached 2,751 contracts against an open interest reading of 100. As represented by the midpoint price ($4.20), the bid-ask spread came out to 9.52%. For the nearer expiry option, volume reached 10,556 contrasts against open interest of 615. Here, the bid-ask spread came out to 8.88%.

For the record, DAL stock closed at $29.02 in the open market last Friday.

Not unexpectedly, the bearish wagers align with current trends in the options market. According to data from Barchart.com, the put/call open interest ratio for DAL stock stands at 0.80. Typically, the delineation point between bullish and bearish sentiment is 0.70, with figures above this threshold implying that more traders are buying puts than calls.

To be fair, analyst opinions regarding DAL stock maintain a “strong buy” consensus rating. However, the average magnitude of bullishness may have dipped ever so slightly. Three months ago, 12 analysts pegged DAL as a strong buy while only one rated it as a hold.

This month, the same number of experts view DAL stock as a strong buy. However, two analysts see the airliner as a hold.

Delta Depends on Economic Stability

At a basic level, lower prices should help DAL stock and the underlying travel industry to recover from the broader impact of the COVID-19 pandemic. It’s just that those lower prices must arrive via good reasons, such as efficient sourcing of jet fuel. However, if they arrive for bad reasons – particularly an economic slowdown or an outright recession – Delta may find itself struggling mightily.

If a positive development exists regarding inflation, it’s that a recognition of higher prices creates an active incentive for consumers to do something with their money; either spend it or invest it. By doing neither of those things, consumers effectively will guarantee themselves wealth erosion.

On the other hand, a deflationary environment facilitates a passive incentive to do nothing. Should borrowing costs rise, it’s likely that purchasing power will increase. Under this framework, consumers enjoy an incentive to neither spend nor invest (unless the opportunity is compelling). Otherwise, by simply doing nothing, consumers can accrue wealth expansion.

In many ways, this monetary canvas may be more vexing for DAL stock than an ecosystem of constantly rising prices. After all, the whole point of Delta’s business is to get people off their couches, not on them.

Flying in a Holding Pattern

While the idea of wagering on a beaten-down DAL stock may seem enticing to contrarians, they may also want to consider the wider economic picture. Should deflation become the dominant monetary trend, the airline industry could suffer an even worse fate than what it did during inflation.



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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.