It was another interesting week for the market as the Nasdaq rallied 3.3%, while the S&P 500 added 1% and the Dow fell 0.6%. That is quite the performance difference between the Nasdaq and Dow!
The Stock – American Airlines (AAL)
After an already vibrant year for air travel, some leading U.S. passenger airlines just provided upbeat forecasts for the holiday travel season, giving investors more reason to cheer.
American Airlines is the world’s second-largest airline as measured by scheduled passengers carried, revenue, passenger miles and daily flights, and if recent trends are any indication, the carrier should benefit from continued improvement in the travel demand backdrop. Last week, the company provided a bullish forecast for the holiday flying season, raising its Q4 adjusted earnings forecast to a midpoint of 65 cents a share, up a whopping 86% from the previous forecast (and the reason for the stock’s latest show of strength).
The optimistic outlook follows a Q3 earnings report that saw revenue of nearly $14 billion increase 1% year-on-year and EPS of 30 cents that, while down 21%, beat estimates by 12 cents. On the earnings call, management emphasized that it’s taking “aggressive action” to reset the airline’s sales and distribution (S&D) strategy while engaging the business travel community, a strategy it expects will improve the revenue performance over time. (The S&D strategy involves renegotiating competitive contracts with a majority of the largest travel agencies and many of its top corporate customers, plus the reintroduction of Corporate Experience benefits for corporate travelers.)
Meanwhile, on the performance front, despite disruptions and financial impacts from the recent hurricanes and the CrowdStrike outage, American reported the highest flight completion rate among U.S. network carriers while registering its best Q3 in terms of load factor since 2013.
Like many peers, deleveraging is a major goal for American, and it strengthened the balance sheet in Q3 by reducing total debt by $360 million; it’s also more than $13 billion toward its goal of reducing total debt by $15 billion by the end of 2025. Wall Street expects the bottom line to decline this year, but this is all about the future, where it sees the success of the S&D strategy bearing fruit with earnings lifting 40% in 2025 and 25% in 2026.
Technical Analysis
AAL has been a laggard in the airline space, peaking at 19 last year, hitting a lower high of 16 earlier this year and declining to as low as 9 when the market tanked in early August. But it’s been pretty much all up since then: AAL has lifted 15 of the past 18 weeks, including last week’s forecast-induced romp to the upside that brought the stock to 17-month highs. Stop – 14.4
The Covered Call Trade
Buy American Airlines (AAL) Stock at 18, Sell to Open January 18 Strike Calls (exp. 1/17/2025) for $1, or a Net Price of 17 or less
Static Return: $100 per covered call (5.88%)
Breakeven: 17
Covered Call Return (if assigned): $100 per covered call (5.88%)
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 17 or less. (In this case 18 minus 1 = 17. Or another example is you could pay 17.75 for the stock and sell the call for 0.75, which also equals 17)
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
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| Toast (TOST) | 38.7 | 38.5 | 30.5 | December 38 -- $2.45 | $1.50 |
| Norwegian Cruise Line (NCLH) | 25.8 | 27 | 22.5 | December 26 -- $1.25 | $1.50 |
| Kyndryl (KD) | 33.75 | 34 | 27.5 | December 34 -- $0.95 | $1 |
The next Cabot Profit Booster issue will be published on December 17, 2024.
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