Will Revenge Travel Lift Delta Air Lines? Options Traders Say No.

By Josh Enomoto

Following the dramatic disruption of the Covid-19 crisis, forward-looking investors bet heavily on the broader travel industry under the reasoning that collective cabin fever would eventually spark a sector-wide rejuvenation. 

For the most part, they’ve been right, with entities such as Delta Air Lines (NYSE:DAL) driving higher from the spring doldrums of 2020. Nevertheless, nothing perpetually rises in linear fashion.

Moreover, DAL stock has been somewhat disappointing if we’re to apply an intellectually honest framework. 

After peaking in early spring of 2021, the air gradually leaked out of the jetliner. And while Delta looked interesting when it soared earlier this summer on management’s boosted outlook regarding travel demand, the enthusiasm has again fallen flat.

That’s particularly disheartening because 2022 was the first time when the revenge travel narrative truly got moving. Further, evidence points to the bullish attitude rolling over into this year, even with inflation skyrocketing and thus crimping purchasing power. Unfortunately, more recent data suggests that the travel bug may be on its last legs.

If so, investors will want to be careful with DAL stock and similar travel-related enterprises. Delta’s stock options canvas gives up the gameplan.

DAL Stock Fires Warning to Retail Investors

Following the close of the Oct. 17 session, DAL stock represented one of the more active options trades based on volume. Specifically, the metric for Tuesday hit 70,552 contracts against an open interest reading of 825,803 contracts. Against the trailing one-month-average metric, the percentage difference for volume that day clocked in at 47.52%.

In terms of transactional breakdown, call volume hit 52,179 contracts against put volume of only 18,373 contracts. At face value, this pairing seems incredibly bullish for DAL stock. After all, call options give the holders the right (but not the obligation) to acquire the underlying security at the listed strike price.

However, there are two sides to every coin. If it turns out that institutional investors are responsible for writing (selling) these calls, then the implication might be bearish. That’s because selling call options obligates the writer to fulfill the terms of the contract, in this case selling the underlying security at the strike price.

What’s more, call writers could be absorbing massive risk if the options are uncovered; that is, the writers lack the stock to sell under exercise.

With that context in mind, Fintel’s options flow screener – which exclusively targets big block trades likely made by institutions – showed that on Oct. 17, traders sold several thousands of calls at the $35 and $36 strike prices. DAL stock closed at $34.68, suggesting an aggressive trade.

Even more telling, institutional traders have heavily sold calls with strike prices ranging from $50 to $70. In contrast, bullish traders are also buying calls but predominantly at lower strike prices such as $40. Put another way, the institutional optimists are taking more calculated, realistic wagers.

Resistance Ceiling Materializes

Taken as a whole, the evidence points to retail traders buying the high-strike-price calls, which seems to suggest that the public still believes in the revenge travel narrative. On the other hand, institutional optimists seem to recognize that travel sentiment is fading, thus taking more measured wagers.

It’s also curious that implied volatility (IV) is on average highest in the far out-the-money (OTM) call direction at the $60 strike price, which prints an IV of 69%. Here, retail traders are likely betting that DAL stock would recover to this point, setting off higher anticipation. But this anticipation also means that call option writers can collect a greater premium for taking the opposite side of the bet.

Now, it’s easy to understand why retail traders are so fixated at the $60 strike for their calls. Prior to DAL stock melting down because of Covid-19, this was roughly the price point that shares reached in early February 2020. The assumption, then, is that Delta will return to these levels.

It seems reasonable but the problem is this: the institutional traders want you to make this trade. In other words, they think it’s a sucker’s bet and will gladly allow you to be the sucker.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. None of the above should be construed as investment or financial advice. Investing is inherently risky. Please perform your own due diligence.

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