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Airline Industry: Perfect Options Play

Posted February 20, 2008

“It doesn’t sound like much until you start looking at what the volatility does for the options market. For short-term options players, this is a fantastic investment opportunity. ” – Andrew Snyder

By Andrew Snyder

Baltimore (TFN) — Imagine you are the chief executive at one of the nation’s largest companies and you are putting the final details into a $20-billion merger with one of your toughest competitors. You had to make a lot of decisions and negotiations to get to that point. Now imagine if the whole deal goes down the drain because of some squabbling amongst the front-line employees. You’d be banging your head into the desk.

Billions of dollars in shareholder equity are in jeopardy and your entire firm is now fully exposed to the industry and its competitors. It is not a situation any of us want to be in, but it does create a unique profit opportunity.

If you have picked up any of the business rags today, you will have read the headlines regarding the possible Delta Air Lines (DAL:NYSE) and Northwest Airlines (NWA:NYSE) merger. Executives at both companies are ready to sign on the dotted line and make the deal happen, but negotiators for the unions representing the airlines’ pilots are putting the crimps on a deal. They are arguing over which pilots have the highest levels of seniority. As if anybody cares.

Let ‘em fight

On the surface, this appears to be the kind of union squabbling that makes my brain burn anytime somebody mentions the notion of an organized workforce. Don’t get me wrong. It is exactly that. But there is a pot of gold at the end of the rainbow, at least for investors.

You see, all of this bickering has allowed share price at both airlines to take a drop. For both firms, share price has dropped by more than a dollar. It doesn’t sound like much until you start looking at what the volatility does for the options market. For short-term options players, this is a fantastic investment opportunity.

If you are not a risk taker, this kind of action is not for you. Don’t break into your retirement savings. But if you are looking for a quick and easy shot at sizeable profits, with less-than-expected risk, this play was created just for you.

They gamble, you win

Delta’s March 17.50 Calls (DALCW.X) are getting lots of attention today and will soar in value if a deal is struck in the next week or so. Northwest’s options are trading in a nearly identical range. Either play would yield the same results.

Obviously, the call options are for folks bullish on the merger, like me. I don’t think the unions would be stupid enough to let a deal like this slip through their fingers. This merger is a matter of survival. They might be fighting for seniority right now, but if they put a stop to the merger, the pilots may be fighting for a spot in the unemployment line in a few months.

If you are an aggressive investor looking for a shot at quick-and-easy profits, this is a great opportunity. This story may not be much more than a few headlines on a slow news day, but it is creating a perfect opportunity to swoop in and bank some bucks. Take advantage of it.

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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