Delta Airlines (DAL) will report their Q2 earnings tomorrow before the bell. The options market is implying about a $2 move in either direction tomorrow, or about 3.3%, which is rich to the average 1.7% one-day post-earnings move over the last four quarters.
Shares of DAL have nearly kept pace with the S&P 500’s (SPX) 19.5% ytd gains, up 18.5%, but outperformed the iShares Transportation etf, the IYT which is only up 13.5%.
Shares of DAL have been fairly range-bound since the start of 2018 while finding massive technical resistance between $58 and $60:
The IYT, which is made up of DAL’s transport brethren has a very different feel than DAL which is for the fifth time in 18 months threatening a breakout to new highs… the IYT’s YTD chart resembles something of a head and shoulders top, and maybe, more importantly, has not confirmed either of the SPX’s new highs since Q3 2018. The 1-year chart of the IYT shows fairly critical technical support between $180 and $175:
I would add that not all of the stocks in the transports are created equal in the current stock market environment as nearly 30% of the IYT are in rails like NSC, UNP and KSU all trade near their 52-week highs, while shippers like FDX and UPS which make up about 16% of the weight trade far closer to their 2019 lows than their 2019 highs.
If I were of the mindset that airlines like DAL will start to discount a strong seasonal Q2, and that a drawn-out trade war will start to weigh on rails, continue to weigh on shippers and truckers like JB Hunt (JBHT), than targeting a break-down in the IYT over the next few months might make a lot of sense as transport after transport offers murky second-half guidance.
So what’s the trade?
Bearish Trade Idea: IYT ($185) Buy Sept 185 / 165 Put Spread for $4.25
-Buy to open 1 Sept 185 put for 5.35
-Sell to open 1 Sept 165 put at 1.10
Break-even on Sept expiration:
Profits of up to 15.75 between 180.75 and 165 with max gain of 15.75 at 165 or lower
Loses of up to 4.25 between 180.75 and 185 with max loss of 4.25 above 185
Rationale: this trade idea risks 2.3% of the stock price, with a break-even down 2.3% with more than two months to expiration.