At an initial reading of the headlines, the surprisingly robust September jobs report should bode well for companies like Alaska Air (ALK). Basically, with more people earning steady paychecks, discretionary funds have a chance to build. Combine this dynamic with the underlying security of a viable labor force and the revenge travel sentiment may lift ALK stock higher.
Sure enough, the unanimous view among 11 Wall Street analysts rate Alaska Air a strong buy. Drilling into quantifiable expectations, the average price target lands at $62.11, up 77% from Friday’s closing price of $35.07. Notably, the high-side target stands at $75 while the minimum target clocks in at $50, which still represents a 42.6% return.
Obviously, that’s a great problem to have, especially in this tricky environment. Still, the heightened expectations for ALK stock isn’t the end-all, be-all for the underlying airliner. Looking at the Barchart Technical Opinion indictor, ALK suffers an 88% strong sell assessment. For the short to medium-term cycles, technical dynamics suggest a decisively bearish outlook.
It’s only in the long term that there’s some hope, with a 50/50 odds of pessimistic trading. Such a stark contrast isn’t exactly what you want to see heading into serious fundamental questions about ALK stock. Earlier this year, Alaska revealed downgraded expectations for third-quarter revenue during its Q2 earnings disclosure.
So, which version of Alaska Air will take off?
Unusual Options Activity Poses Worries for ALK Stock
Following the close of the Oct. 6 session, ALK stock represented one of the top highlights in Barchart’s screener for unusual options volume. Specifically, total volume for Alaska Air derivatives reached 13,301 contracts against an open interest reading of 65,028. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 502.67%.
Drilling down into the transactional details, call volume hit 1,437 contracts against put volume of 11,864 contracts. On paper, this pairing yielded a put/call volume ratio of 8.26, which is unsightly as it indicates far more puts being bought than calls. From a surface-level reading, this may indicate bearish sentiment.
However, it’s important not to jump to conclusions. In many cases, institutional traders may egg on retail traders by writing (selling) put contracts, taking advantage of heightened implied volatility for puts at certain strike prices or because they have strong conviction that the underlying security will not fall.
To better assess the context, it’s important to consider options flow data, which screens exclusively for big block trades. However, doing this exercise for ALK stock reveals that the last major transaction for its derivatives occurred on Sept. 19. Coincidentally, this trade represented sold options of the Oct 20 ’23 35.00 Put. Such a trade loosely may assume a floor exists at $35.
Again, coincidentally, ALK stock closed at $35.07 on Friday, as stated earlier.
That might give some measure of confidence to the bulls. However, drilling into unusual options activity, the driving force behind Friday’s aberrant options volume stemmed from the Nov 17 ’23 32.50 Put. Volume clocked in at 5,782 contracts against open interest of only 94. This suggests an immediate surge of demand for this previously “underserved” options contract.
From the evidence I have available, the demand appears to be coming from the collective action of retail traders. It’s also a particularly shrewd move, given how the delta of the put has recently been “rising” toward -1. So, those taking the opposite (long) side of the bet may be going against prevailing retail wisdom.
The Jobs Report May be a Harbinger Than a Blessing
Intuitively, lay observers may perceive the surprisingly strong September jobs report to be a blessing. After suffering from much uncertainty throughout the pandemic and post-pandemic years, the dark clouds appear to be breaking. However, that might be the wrong assessment.
Predominantly, all eyes will be on the Federal Reserve. Yes, sentiment for equities spiked up on Friday. However, it doesn’t dramatically change the overall anxious tone that the benchmark indices have set recently. With the central bank fighting stubbornly elevated inflation, it may be forced to raise interest rates again (and perhaps more aggressively).
If so, that action could trigger a recession. At the very least, companies that have benefited from prior easy money policies will find it more difficult to finance their expansionary ambitions or operations. Therefore, a great jobs report today may translate to rough outings in the future. That probably won’t favor ALK stock; hence the sudden demand for put options.
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.
