Delta Air Lines is having a stellar year and is currently up over 59%.
At the same time, implied volatility is very high at 39.02%, which gives Delta Air Lines stock an implied volatility (IV) percentile of 81%.
That just means the current level of IV is higher than 81% of all other occurrences in the last 12 months.
As option traders, we can take advantage of that high volatility by selling a short strangle.
A short strangle involves selling an out-of-the-money put and an out-of-the-money call with the same strike price with the same expiration date.
This trade generates a large amount of premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky because they expose the trader to potentially unlimited losses.
However, if the trader is right and the stock trades sideways, the trader gets to keep the full premium.
Assuming a trader believes that Delta Air Lines stock will trade sideways over the next few weeks. He or she could sell a Nov. 29, 60 put and a Nov. 29, 68 call.
Delta Air Lines Trade Generates $175 In Premium
The 60 put could be sold for around $0.80 and the 68 call could be sold for around $0.95.
Selling those two options would generate a total of $175 in premium. That is the maximum possible gain on the trade if Delta stock closes between 60 and 68 on the day of expiration.
To work out the break-even price of the trade, take the lower strike price of 60 minus the total premium received of $1.75, which gives 58.25.
Then on the call side, take the call strike and add the premium, which gives 69.75.
This trade is a short vega trade. That means if implied volatility increases early in the trade, losses could occur.
Short strangles are an advanced option strategy, so if all that sounds confusing, it's best not to trade them.
With a trade like this the potential losses are unlimited and a lot higher than the potential gains. So traders would want to be very confident that the stock is going to remain flat over the course of the trade.
Exit Strategy For Delta Option Trade
A stop loss could be placed at the break-even points.
Alternatively, bullish investors could take ownership of the stock if it drops below 60 at expiration.
According to the IBD Stock Checkup, Delta Air Lines is ranked No. 6 in its industry group. It has a Composite Rating of 79, an EPS Rating of 15 and a Relative Strength Rating of 94.
Delta Air Lines is a major U.S. carrier, providing domestic and international passenger and cargo services. It is one of the four airlines that control the majority of the U.S. aviation market.
Late Tuesday, Spotify jumped after beating expectations for subscribers and total users in the third quarter. So the cash-secured put discussed Monday looks like it will be a nice winner.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
