First Class or Cargo on United Airlines (UAUA)

Posted on January 15th, 2010 by Mojo

The airlines in general have been on a tear.  United (UAUA) broke out on the daily chart back on Dec 1 at $8 and we are sitting just below resistance at $13.93 right now.  Take a look:

20100115 UAUA Chart

We have earnings coming up and IV (implied volatility – think of this like a measure of the buying pressure on the options) is high.  Here’s my thinking…

Once the “unknown” of the earnings announcement becomes known (either through the actual announcement, pre-announcement, or another carrier’s information) the IV will deflate out.  Short of a big surprise that should happen quickly and without a ton of price movement.  So, I’m going to sell an ATM call and an ATM put  (short strangle).

Now, the probabilities of all of this happening correctly are a bit low (I figure 30%) so I’m going to do few things.

  1. I’m  going buy a put or call for each short for protection.  If UAUA goes to $0 (zero) or goes to $100 I’m protected.
  2. If I get some movement, but not a lot, I’m going to close the costly side and reposition.  This will help increase my probabilities.
  3. I’m going to severely limit the amount of capital I have risked on this trade.

Max Profit (if held to expiration and price stays right at $14) would be $1,700 on $200 risked.   Likely profit (two weeks in, price stays within breakevens or at least I’m able to adjust) would be $200 on $200 risked.

20100115 UAUA Risk

If I’m wrong I only lose the $200, if I’m right I could double my money.  If I’m really right I could make 500%.

Hmm… I just saw something that would keep me from doing this trade.  Can you guess?

Mojo

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Comments:

  1. I thought maybe there was significant news, but I can't find any.

    The price has gone down quite a bit today so that your position wouldn't be centered, and there isn't really a good way to center it (that I can see...).

    I give up. What did you see that made you hesitate to do this trade?

    - Mark      by mcowley
  2. And the IV has been falling leading up to earnings? So the max IV change is about 8 points now?      by MatthewHaley
  3. Good thought on IV. I was thinking about commissions actually. Since this is a four leg best, if I'm priced out at $1 per leg per side that's $80 in + $80 out. If I'm hoping to make $200, losing $160 on commissions wouldn't be wise.

    I like TOS, but not that much!

    Mojo      by Mojo
  4. Aside from the matter of commissions, earnings have to be the trickiest aspect of these short gamma trades. Not only does the IV increase make it hard to predict what the price will be in the future. I've had the price of a short strangle double between four days before expiration and three days (with earnings on the second to last day) but also the charts don't work as well. Not sure why this is but maybe it's because so many big boys have the inside info and so don't trade normally.      by redgam26
  5. What I meant to say is not that the price itself doubled. But that my G/L (loss in this case) doubled.      by redgam26
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