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How to Trade Delta Air Lines Stock After Earnings

Nicolas Chahine

The stock market is having its worst week in years. The drop in the Nasdaq yesterday was the worst since Brexit. Yesterday markets fell 4% on broad fears that stemmed from U.S. Federal Reserve rhetoric.

It’s not so much what they did but rather what the Chairman Jerome Powell said last week. Traders now believe that the Fed will overshoot with their tightening cycle. If they do, this could cause the stock market to go into a bearish phase.

Wall Street was already worried about tariff wars, especially the one with China. Then there’s also the fear of rising bond yields. The 10-year yield, for example, spiked too fast towards 3.25%. So investors have a lot to fret and it is understandable that equity bulls are hesitant to buy the dip quickly as they had been.

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The good news is that nothing has changed in the corporate profit and loss statement. Apple (NASDAQ:AAPL), for example, is going to sell just as many iPhones regardless of what the Fed does in the short-term. There might be some issues managing there supply chain but in the end the company will be growing its profits over time.

This morning Delta Air Lines (NYSE:DAL) reported earnings and the stock is rising on the headline. Management beat the expectations metrics. They grew profits and sang an optimistic tune. More importantly, Delta stock raised forward guidance, thereby extending the beat into next quarter.

DAL management demonstrated pricing power behind strong demand. I flew Delta Air lines this weekend and I can attest to the nickel-and-dime process. It seemed like anything I wanted was extra, so they were definitely in the driver’s seat.

This is not the airline industry of old. DAL stock and others are making more money now that they have for decades.

So there’s all this good news, but you couldn’t tell this from looking at Delta stock. It fell 15% in just over three weeks and it’s down 10% year-to-date. So maybe this rally on earnings could have staying power in order to recover some of that chart pessimism.

But it in this nervous stock market, I will not risk $51 per share to buy the stock and hope it does recover. Instead I will sell downside risk much lower than the current price to leave myself room for error.

My theory is that Delta Airlines stock has shed a lot of its froth, thereby leaving the probability of it falling a lot further from here minimal. Simply stated, I have more faith in the downside support then in upside opportunity.

If the market stabilizes then I could add a debit call spread position to capture any upside momentum. For now, I want to chase the opportunity to create income without any out-of-pocket expense from DAL stock.

Wall Street experts agree, as they rate it as a buy, yet it’s trading much lower than all their price ranges. So it has some living up to do in the next few months.

Technically, Delta stock is bouncing off a long-term pivot zone. Those tend of be support on the way down. I think of them as rubber bands not hard lines in the sand.

Delta Stock Trade Idea

The Trade: Sell the DAL Jan 2019 $44 put and collect $1.10 per contract to open. I have a 85% theoretical certainty so that I retain maximum gains. Otherwise, I will accumulate losses below $42.90.

Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell the DAL Jan 2019 $44/$43 bull put spread. Here my risk is smaller yet the spread would yield 15% on risk. Compare this with risking $51 to buy the shares and leaving no room for error.

Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.

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