Southwest Is at Its Lowest Multiple Ever

NEW YORK (Real Money) -- Southwest Airlines  (LUV) is widely considered to be the best operator among the major airline carriers. The company was able to maintain profitability even during the Great Recession. Southwest sports a healthy balance sheet and just raised its dividend by 25%. 

Earnings per share have been flying high, having surged from $0.43 in 2011 to $0.56, $1.05 and $1.64 during 2012 through 2014 respectively. Lower jet fuel prices allowed first-quarter 2015 EPS to hit $0.66 vs. $0.22 a year earlier.


It always seems scary to play a stock that has gone up significantly and then started pulling back. With fundamentals this good, however, the lower price appears to be a good second chance opportunity.

Buying Southwest shares while selling Jan. 2017, near-the-money covered calls and slightly in-the-money naked puts offered a very favorable total return potential on anything more than 3% rise over time.

Use the $35 call and put to reduce the initial cash outlay. Barring actual exercise, paid-up marginable equity can secure the put without incurring a greater than $2,238 outlay.


At the currently available option prices, however, our break-even point would be reduced to well under $29 a share. Anything less than a 16% decline would leave us with a profit if we simply liquidated right away.

No investments in stocks or options will ever be completely riskless. Setting up trades like this one, though, can help skew the odds in your favor.

Editor's Note: This article was originally published at 11:30 a.m. on Real Money Pro on June 10, 2015.

At the time of publication, Paul Price had a short position in Southwest Air January 2017, puts.

More from Investing

Marc Chaikin's Technical Tools: Cramer's Off the Charts

Marc Chaikin's Technical Tools: Cramer's Off the Charts

Carnival CEO Arnold Donald: China Will Become the Largest Cruise Market

Carnival CEO Arnold Donald: China Will Become the Largest Cruise Market

Bitcoin Today: Prices Plummet Below $8,000 in Market Downturn

Bitcoin Today: Prices Plummet Below $8,000 in Market Downturn

Why HP Enterprise's Stock Plunged After It Beat Earnings

Why HP Enterprise's Stock Plunged After It Beat Earnings

Has Wall Street Completely Lost Its Mind on General Electric?

Has Wall Street Completely Lost Its Mind on General Electric?