Want 32% Yield in 2 Weeks? Spirit Airlines (SAVE) Can Offer Just That!

Discount carrier Spirit Airlines (SAVE) is in trouble, that much is obvious. A report came out from The Wall Street Journal that per individuals familiar with the matter, the struggling company is considering filing for bankruptcy. It wouldn’t be the most surprising event to occur in the market in recent memory, with SAVE stock suffering a severe loss of value prior to this latest debacle.

Of course, the report didn’t help matters. On Friday, SAVE stock suffered a decline of almost 25%. In the afterhours session, shares continued to take a hit, albeit modestly (relatively speaking) at 1.78% down. As Barchart content partner The Motley Fool mentioned, Standard & Poor’s had previously downgraded the airliner’s bonds to “junk” status.

So, whether there’s truth to the matter about Spirit going under, the writing is essentially on the wall. Nevertheless, it’s fair to point out that management itself has not issued the bankruptcy statement. Rather, it’s a news organization citing unnamed sources. That doesn’t mean the report is necessarily incorrect. However, without official confirmation, it’s difficult to know for sure.

Now, the standard guidance among financial publications is to avoid this messy airliner ecosystem. Don’t touch SAVE stock and don’t touch its rivals, such as Frontier Group (ULCC), which may benefit from the loss of competition. Under a debit-based framework, I’d agree: the stocks of these discount airliners are too volatile.

However, a credit-based approach could be quite intriguing — and Barchart Premier offers the most compelling multi-leg option transactions to consider.

Extracting Profits from Pricing Inefficiencies of SAVE Stock Options

At the core, deploying a credit-based options strategy centers on profiting from pricing inefficiencies; in this case, the pricing of premiums that have become overheated relative to historical or expected norms. Specifically for SAVE stock, its option chains’ implied volatility (IV) on average has risen significantly above its historical volatility (HV).

On Friday, Barchart’s screener for unusually high IV pinged Spirit Airlines as running well above normal. Generally speaking, when IV runs hot, it indicates that demand for the option is elevated. Therefore, a debit-based strategy (i.e. buying options) wouldn’t necessarily be advantageous, all other things being equal. Instead, it may behoove the trader to consider selling options.

However, selling or writing options carries the risk of meeting the obligation of the contract upon exercise by the other party. To counter this risk, astute traders leverage what’s known as a vertical spread: they sell an option to generate income and simultaneously buy the same option to cap off the risk.

With SAVE stock, the put options — which give holders the right (but not the obligation) to sell SAVE at the listed strike price — feature higher IV than the call options, which makes sense. With the bankruptcy rumor, people are betting against Spirit; hence, the heightened demand. However, it’s also possible that this premium has become excessively overvalued and thus inefficient.

Here’s the thing: the market is forward looking. So, it’s quite possible that most of the bad news associated with the bankruptcy rumor has been baked into the SAVE stock price. If so, the next few moves could eventually work their way to the upside.

Please hear me clearly: I’m not suggesting that SAVE stock will recover from here. The financial situation does not look pleasant and no one wants to touch the company’s debt. Bankruptcy may be an inevitability. However, as long as it’s not an inevitability right away, contrarians could pick up some quick yield.

Grabbing 32% Yield in Less Than Two Weeks

While many financial publication firms talk about cash-secured puts, they generally require a significant amount of capital due to the option multiplier (that is, options pricing must be multiplied by 100 shares). When you’re talking about three- or four-digit securities, cash-secured puts can get out of hand.

That’s where the bull put spread comes into the picture. By selling and buying a put option at different strike prices, the participating trader never has to worry about forcibly acquiring100 shares of the underlying asset. Further, the maximum risk and reward is defined upfront, facilitating money management.

Now, the traditional process of finding appropriate trades involves manually digging through a security’s options chain and calculating prospective transactions. That could take forever — much like eating soup with a fork. Instead, Barchart Premier’s algorithm does all the heavy lifting for you. All you have to do is to decide which trade works with your particular risk tolerance framework.

One idea to consider for SAVE stock is as follows:

• Expiration date: Oct. 18, 2024
• Sell the $1.50 put at a bid of 20 cents per contract.
• Buy the $1 put at an ask of 8 cents.
• The net income received (12 cents) is the maximum we can earn from this trade.
• The maximum loss comes out to 38 cents.
• Notably, the risk-reward ratio is 3.17 to 1, translating to a yield of 31.58%.
• Breakeven sits at $1.38.

So long as SAVE doesn’t drop below $1.38, the above bull put spread will be somewhat profitable. And if Spirit manages to stay at or above $1.50 by expiration, the speculator will receive the max reward. On Friday, SAVE closed at $1.69. That means it can drop 18% and the bull put spread will still be slightly profitable.

A Bonus Idea to Consider

If you’re really feeling the contrarian urge, you can also temporarily short Frontier Group with a similar strategy called the bear call spread. Here, we’re selling call options (instead of puts), betting that the targeted security will go down. For ULCC stock, it already gained over 16% on Friday following its rival’s bankruptcy rumor.

Let’s suppose that management dismisses said rumor. That could send ULCC stock down in a hurry. Further, if SAVE manages to march higher in the next two weeks, that could impugn upon the price action of Frontier Group. Until Spirit confirms the rumor, ULCC will be risky, especially after such a strong run.

Here’s one bear call spread to consider:

• Expiration date: Oct. 18 (same as SAVE)
• Sell the $6 call at a bid of 35 cents.
• Buy the $7 call at an ask of 15 cents.
• The net income received (20 cents) represents the most we can earn from this trade.
• The maximum loss comes out to 80 cents.
• Risk-reward lands at 4 to 1, translating to a yield of 25%.
• Breakeven clocks in at $6.20.

ULCC stock closed at $5.81 on Friday. So long as it doesn’t rise to $6.20, traders will be at least somewhat profitable. That gives around a 6.7% margin of safety. As you can see, though, SAVE offers a “better” deal and that’s partly because of the IV differential.

For Spirit, average IV hit 248.6% against HV of 89.49%. On the other hand, ULCC’s IV was 92.46% versus HV of 69.47%.

Barchart Premier: Don’t Trade Without It

Before you leave, here’s one number to take with you: 14.

What does that mean? That’s the total number of bull put spread opportunities in SAVE stock that are available for the Oct. 18 options chain. I only chose one transaction. However, traders come in all shapes and sizes. What’s appropriate for one might not be appropriate for another.

With Barchart Premier, its proprietary algorithms fish out all the mathematically viable options spreads. You just have to pick out the one that works for you and then enter the corresponding data into your trading or brokerage platform.

Quite frankly, it also means that you never have to listen to unproductive aphorisms about sitting on the sidelines until the market clears up. With risk-controlled vertical spreads, you can earn income off the volatility, thereby opening an entirely new avenue of opportunities.

All this for what amounts to a subscription to a streaming service. So, don’t hesitate — get Barchart Premier and level the playing field!

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.