July 25, 2023

Before we dive into this week’s covered call idea we need to address one position from the July expiration cycle.

We are holding Las Vegas Sands (LVS) stock and no option position as the July 60 call that we had sold expired worthless. Today let’s sell a new call. Here are the details:

Sell to Open the LVS August 58 Call (exp. 8/18) for $1.35 (approximately)

Moving on …

Sector and index rotation was the name of the game last week as money raced out of tech to end the week and into sectors that had not been participating in the market’s advance recently. That being said, this is not necessarily a bad sign as the S&P 500 gained 0.7%, the Dow rallied 2.08% and the Nasdaq lost 0.6%.

The Stock – United Airlines (UAL)

Why the Strength 

Nobody is claiming that airlines are now true growth stocks, but it’s looking like this upcycle for the industry will be much more durable and profitable than past ones—even as ticket prices are starting to come off from elevated levels—thanks in large part to pilot shortages, supply chain issues (new planes and repair work) and infrastructure tightness (crowded airports and limited airplane slots).

United Airlines has been outspoken about the issues, allowing it to get ahead of the first two (including a new pilot agreement), though it’s still working on infrastructure limitations (expanding at smaller hubs and especially internationally). Of course, capacity here is still going up a lot as the industry catches up from the pandemic cutbacks—United flew 17% more miles in Q2 than a year ago—but demand is still super-strong and costs are in check, which is leading to a mountain of earnings and cash flow.

Indeed, in January, United said it thought it could make $11 per share this year, but analysts refused to believe it; now they’re coming around, but the top brass here actually upped their full-year guidance ($11.50 at the midpoint) and that includes some conservatism about higher costs in the second half of the year. And free cash flow is even larger (north of $9 per share in the first half of the year!), allowing the firm to rapidly pay off debt (down $2.6 billion from a year ago).

In last week’s conference call, management said demand in September and October look strong relative to even July and August, as well as compared to pre-pandemic 2019 levels, which is obviously a good sign. And longer term, they continue to think margins can improve one to two percentage points each year into at least 2026, thanks in large part to bets on international travel. If management is even half right, United’s bottom line is going to be massive for a long time to come.

Technical Analysis 

UAL and most airlines looked ready for prime time in January, when the stock showed outstanding price and volume action, but the market wasn’t ready yet, with the March banking-induced dip causing shares to fade. But the 40-week line held, UAL tightened up and then began to push higher in May—with the momentum continuing into late June. There was a pre-earnings wobble, but we think the earnings reaction last week (along with the higher earnings estimates) paves the way for higher prices. Stop — 49.5

The Covered Call Trade
Buy United Airlines (UAL) Stock at 54.5, Sell to Open August 55 Strike Calls (exp. 8/18) for $1.50, or a Net Price of 53 or less
Static Return: $150 per covered call (2.83%)
Breakeven: 53
Covered Call Return (if assigned): $200 per covered call (3.77%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 53 or less. (In this case 54.5 minus 1.50 = 53. Or another example is you could pay 54.25 for the stock and sell the call for 1.25, which also equals 53)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on August 1, 2023.