OK, who ticked off the ghost of Herb Kelleher? LUV dropped over 5% yesterday, the equivalent of 4 standard devs. Flight cancellations due to maintenance problems, delays in the new Hawaii routes, and a rising – if unnecessary – concern about safety drove it lower. And a 4 s.d. drop is very black swan-ish, which isn’t what you want associated with an airline. Given that any of this news isn’t really new, it’s just as likely that the ghost of LUV’s recently deceased founder spooked the market. LUV’s IV jumped as the stock fell, but is still relatively low 35% IV rank. That suggests that the market may not be as scared of LUV as you might think, and the high trading volume could indicate selling from margin calls or running stops. Either way, maybe the spirit of Kelleher will restore faith in his old airline and keep the stock from dropping more. If you think LUV might bounce off this sell off and are considering a bullish trade, the long call vertical that’s long the 53 call and short the 55 call in the March weekly expiration with 36 DTE is a bullish strategy that has a 60% prob of making 50% of its max profit before expiry.
Opened 19/02/15 for $1.10 debit
Closed 19/02/28 for $1.50 credit