Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Bullish On Southwest Airlines? Cash-Secured Puts Make LUV Stock More Affordable

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsSep 22, 2021 13:44
uk.investing.com/analysis/bullish-on-southwest-airlines-cashsecured-puts-make-luv-stock-more-affordable-200497294
Bullish On Southwest Airlines? Cash-Secured Puts Make LUV Stock More Affordable
By Investing.com (Tezcan Gecgil/Investing.com )   |  Sep 22, 2021 13:44
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Southwest Airlines (NYSE:LUV) stock returned about 29% in the past 52 weeks and 6% year-to-date. LUV shares hit a 52-week high of $64.75 in mid-April. But since then, they have lost close to 25% of their value.

LUV Weekly Chart.
LUV Weekly Chart.

By comparison, the Dow Jones US Airlines Index is up 37% in the past year and 6% so far in 2021. It saw a multi-year high in mid-March. Since then, however, the index has also lost about 23%.

LUV stock's 52-week range has been $35.82 - $64.75. Yesterday it closed at $49.15.

Despite the recent decline in price, Wall Street is still bullish on the airline in the long run. According to 22 analysts polled by Investing.com, the 12-month median price forecast is $65.51, implying a return of well over 30%.

Consensus Estimates.
Consensus Estimates.

Chart: Investing.com

So today, we look at how bullish investors might consider selling cash-secured put options on LUV stock. Such a trade could especially appeal to those who want to receive premiums (from put selling) or to possibly own Southwest Airlines shares for less than their current market price of $49.15.

We previously discussed the detailed mechanics of cash-secured put selling using Exxon Mobil stock. Readers who are new to put selling may want to consider reviewing that article.

Selling Cash-Secured Puts On LUV Stock

Investors who write cash-secured puts are typically bullish on a stock during the timeframe that extends to the option expiry date. They generally want one of two things—either to:

  • Generate income (through the premium received by selling the put); or
  • Own a particular stock, in spite of finding the current market price per share (i.e., $49.15 for LUV now) higher than what they would like to pay.

A put option contract on Southwest Airlines stock is the option to sell 100 shares. Cash-secured means the investor has enough money in their brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy LUV stock, but does not want to pay the full price of $49.15 per share. Instead, the investor would prefer buying the shares at a discount within the next several months.

One possibility would be to wait for Southwest Airlines stock to fall further, which it might or might not do. The other possibility is to sell one contract of a cash-secured LUV put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting in this trade until the option expiry date of Dec. 17. As the stock was $49.43 at the time of writing, an OTM put option would have a strike of 47.50. So the seller would have to buy 100 shares of Southwest Airlines at the strike at $47.50 if the option buyer were to exercise the option to assign it to the seller.

The LUV Dec. 17, 2021, 47.50-strike put option is currently offered at a price (or premium) of $2.54.

An option buyer would have to pay $2.54 X 100, or $254, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. This put option will stop trading on Friday, Dec. 17.

Risk/Reward Profile For Unmonitored Cash-Secured Put Selling

Assuming a trader would enter this cash-secured put option trade at $49.43, at expiration on Dec. 17, the maximum return for the seller would be $254, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if LUV stock closes above the strike price of $47.50. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of Southwest Airlines stock is lower than the strike price of $47.50) any time before or at expiration on Dec. 17, this put option can be assigned. The seller would then be obligated to buy 100 shares of LUV stock at the put option's strike price of $47.50 (i.e., at a total of $4,750).

The break-even point for our example is the strike price ($47.50) less the option premium received ($2.54), i.e., $44.96. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of Southwest Airlines at the strike price of $47.50. Then, in theory, the stock could fall to zero.

If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership but partially offset by the premium (of $254) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This strategy can be a way to capitalize on the choppiness in LUV stock in the coming weeks.

Investors who end up owning Southwest Airlines shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares.

In other words, selling cash-secured puts could be regarded as the first step in stock ownership.

Bullish On Southwest Airlines? Cash-Secured Puts Make LUV Stock More Affordable
 

Related Articles

Bullish On Southwest Airlines? Cash-Secured Puts Make LUV Stock More Affordable

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email