Delta Airlines Short Strangle Could Produce $175 In 2 Weeks

Delta Airlines (DAL) is currently showing above average volatility with an IV Percentile of 81% and an IV Rank of 65.32%.

DAL rates as a Strong Buy according to all 19 analysts and the stock is up 64% in the last three months.

Delta Air Lines is one of the four carriers that controls the majority of the US aviation market (the carriers account for more than 60% of the domestic market share).

The bulk of this Atlanta-GA based carrier's revenues are recognized from its airline segment.

The balance is represented by the refinery segment, which operates for the benefit of the airline division by providing it with jet fuel from its own production and agreements with third parties.

Today, we’re going to look at a short strangle trade due to the high IV percentile.

A short strangle aims to profit from a drop in implied volatility, with the stock staying within an expected range.

When implied volatility is high, the wider the expected range becomes.

The maximum profit for a short strangle is limited to the premium received while the maximum potential loss is unlimited. For this reason, the strategy is not suitable for beginners.

DAL SHORT STRANGLE

Traders that think DAL stock might remain stable over the next few weeks could look at a short strangle.

As a reminder, a short strangle is a combination of an out-of-the-money short put and an out-of-the-money short call.

The idea with the trade is to profit from time decay while expecting that the stock will not move too much in either direction.

For DAL stock, a November 29 put with a strike price of $60 could be sold for around $0.80.

Then the short call, placed at the $68 strike, could be sold for around $0.95.

In total, the short strangle will generate around $1.75 per contract or $175 of premium.

The profit zone ranges between $58.25 and $69.75. This can be calculated by taking the short strikes and adding or subtracting the premium received.

If price action stabilizes, then short strangles will work well. However, if DAL stock makes a bigger than expected move, the trade will suffer losses.

Conclusion And Risk Management

One way to set a stop loss for a short strangle is based on the premium received. In this case, we received $175, so we could set a stop loss equal to the premium received, or a loss of around $175.

Another way to manage the trade is to set a point on the chart where the trade will be adjusted or closed. That could be around $61 on the downside and $67 on the upside.

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.

On the date of publication, Gavin McMaster 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.