UAL Gets Long Strangle, Climbs

The airline sector is also rallying, showing more strength than the broader market.
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By Jud Pyle, CFA, chief investment strategist for the Options News Network

Shares of

UAL

(UAUA)

are currently up more than 5% on the day, and options action in the airline name suggests at least one investor anticipates even greater moves throughout the later term.

UAUA did not announce any news today, but the stock has gained more than $1.10 to $22.66 so far on the day. It's interesting that the rest of the airline sector is also rallying, and showing more strength than the broader market. UAUA is due to announce earnings figures on April 27 before the market opens, and analysts polled at Thomson Reuters anticipate an earnings loss of $1.04 per share. So, could volatility continue to move shares of UAUA? A look at a long strangle in the stock suggests that thesis is plausible.

During morning trading, an investor bought 11,000 June 16-24 strangles for $1.85 per spread, calling for the stock to move significantly throughout the next few months. The June 16 puts changed hands for 50 cents per contract, while the June 24 calls traded for $1.35 per contract. This trade calls for UAUA shares to decline below $14.15 or soar higher than $25.85 prior to June options expiration.

An investor who buys a strangle calls for volatility to kick in and for the stock to move significantly in one direction or the other away from the breakeven prices.

>> Who Owns UAL?: Appaloosa Management

The June 16 puts have dropped four cents and the June 24 calls have gained 49 cents so far on the day. Implied volatility of the puts is 76%, and the June 24 calls have an implied volatility of 56%, compared to the stock's 30-day historical volatility of 41%.

UAUA shares reached a 52-week high of $22.32 yesterday, and it looks like at least one investor is willing to risk $1.85 per spread on a bet that could produce unlimited returns if the stock breaks lower or rallies significantly during the next 65 days.

Jud Pyle is the chief investment strategist for Options News Network and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.

Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."