Unusual Options Activity: Although Cisco Had 4 of the Top 15, AAL Is the Buy

There were 918 unusually active options in Wednesday's Trading. These options have Vol/OI (open interest) ratios of 1.24 or greater and expire in a week or later. 

Cisco (CSCO)calls were prevalent yesterday, with four strike prices in the top 15. Unsurprisingly, Cisco’s options volume yesterday was 244,144, 4x the 30-day volume. Investors had some positive vibes about the stock. 

However, as unusually active options go, yesterday's most attention was given to an American Airlines (AAL) call with a Vol/OI ratio of 375.20. 

I’m not very warm to airline stocks, but this particular call is an intriguing play. Here’s why I feel this way. 

The Call Option in Question

Before I get into why American Airlines might be a stock to buy, let’s consider its options action from yesterday. 

First, it was tops among the 915 unusually active call and put options. The stock’s options volume was 400,939, about 3x the 30-day average. The 72,038 on the Nov. 29 $13 strike represents about 18% of the total volume. I don’t think that’s a record, by any means, but it’s still quite unusual. 

In fact, the 400,939 options volume was the third-highest in 2024.

Now, if you look at the P/C Vol and P/C OI columns, you’ll see that the open interest remains very bearish between 2.87 and 3.00. However, the P/C Vol indicates the bullish/bearish view on Wednesday was very bullish at 0.36, well below the other two highest volume days in 2024. 

Somebody had a major crush on the Dallas airline. 

The top trade was cancelled. However, two trades for 34,999 occurred at 10:33 and 10:42 yesterday morning, accounting for 97% of the call’s volume. 

What’s the Thought Behind This Trade

Although AAL stock has risen more than 15% in the past month, it is still down over 6% year to date and 58% in the past five years. AAL’s all-time low is $8.25 (May 11, 2020), and its all-time high is $59.08 (Jan. 1, 2018). 

So, the halfway point between the high and low is $33.67, 164% higher than where it’s currently trading. That’s a lot of potential gains should American Airlines' performance go exceedingly well. 

With interest rates coming down and consumer spending remaining in positive territory—U.S. retail sales in September, excluding autos and gas stations, rose 0.7% in the past month, with wealthier Americans powering the gains—combined with a bullish stock market suggests that Americans aren’t going to suddenly stop traveling heading into the holiday season and 2025. 

The airline reports Q3 2024 results on Oct. 24, a week from today, before the markets open. Yahoo Finance data says it’s expected to report $13.47 billion in revenue, $40 million less than a year ago, with earnings per share of 15 cents, down from 38 cents a year ago. 

Despite the comedown from a year ago, nine of 18 analysts rate it a Buy, with only two Sell ratings among them. Also positive is the fact that some of these analysts have moved their earnings estimates higher in the past month, a sign that business is strengthening. 

United Airlines Holdings (UAL)reported Q3 2024 results on Tuesday and they blew the door off estimates with revenues and earnings higher than Wall Street expectations. United sees clear skies ahead as it reduces the number of flights it offers and stops discounting flights. 

American may report a similar situation, lighting a fire under its share price. 

The Bottom Line Cost of the AAL Call

Look, the worst case scenario is that you bought a call for $89, which is a down payment of 6.8% on the $13 strike--normally, I like the down payment to be no more than 5% of the strike but when it’s on a share price under $20 or $30, it’s fine--and things don’t work out and you’re out of pocket on that bet. It’s less than a night out. 

However, with an ask price of $0.89 and a delta of $0.52061, you can double your money on the call by selling it before its expiry in 44 days if AAL shares have appreciated by at least $1.71 ($0.89 divided by the delta of 0.52061) or 13.3%. 

Given it reports well before the Nov. 29 expiry, there is plenty of time to exit the trade profitably, even if next week’s earnings don’t go as positively as hoped. 

Clearly, the two large trades were willing to make a down payment of $6.2 million (34,999 x 2 x $89) to either make $6.2 million (100% return) in 45 days or to buy the stock for $13.89 at expiry to hold for the long haul.    

From where I sit, it seems like a winner.

 

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On the date of publication, Will Ashworth 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.