Before we dive into this week’s covered call idea we need to move on from our Rocket (RKT) position following expiration last Friday as the call expired worthless, leaving us with our stock position.
To execute this trade you need to:
Sell RKT Stock.
Moving on …
Another week, another all-time high for the S&P 500 and Dow, while the Nasdaq is slowly creeping towards its previous highs. By week’s end the S&P 500 had gained 0.6%, the Dow had rallied 1%, and the Nasdaq had risen marginally.
The Stock – Delta Airlines (DAL)
The airline industry is rounding out what has been a stellar 2024—according to the International Air Transport Association, net profits for the global airline industry are expected to improve in 2024 by 11% from a year ago, while total travelers are expected to reach a record high of five billion. Meanwhile, the domestic flight industry is coming off one of the strongest summers ever, as air travel demand broke several records in the U.S. during the latest travel season, and the fact that oil (fuel) prices have been on the skids of late only adds to the earnings power of the industry.
Business has been particularly brisk for Delta, the nation’s largest passenger airliner by revenue and market share. The company is seeing “an improving industry backdrop and strong demand for travel,” which positions it for a strong finish for the year. More recently, it reported top- and bottom-line misses for Q3, with revenue that was up a smidge from a year ago and earnings of $1.50 a share that was 2% below consensus and down 26% from a year ago.
However, the stock is strong because earnings remain elevated and it’s looking like results will actually improve from here: The company expects to grow Q4 earnings at least 30% over last year’s Q4, with pre-tax income of $1.4 billion which, if realized, would mark one of the best fourth quarters in its history. Management also highlighted the firm’s double-digit operating margins and year-to-date free cash flow of nearly $3 billion, and it said year-to-date profitability should represent 50% of the industry’s total profits with a double-digit return on invested capital that’s more than twice the industry average. Encouragingly, the business travel sector—which remained stuck in a recession a year ago—has improved nicely, driven by the return of corporate demand and in-person business interactions.
Looking ahead, the top brass sees earnings growth and margin expansion trends continuing in 2025, while Wall Street expects earnings to jump 20% for the full year, lifting over $7 per share. It’s obviously cyclical, but the earnings power here remains huge.
Technical Analysis
DAL has been very volatile the past couple of years, with shares alternating between a strong month or two or three and deep corrections afterwards. After rallying in the first half of 2023, it hit a peak at 50 last July, then rode the rollercoaster down to 30 in late October. The next extended rally took the stock to a higher peak at 53 followed by another deep—but less severe—decline to a higher low at 37 in August. But I like it today because the last leg higher looks like the real deal, with DAL moving to four-year highs as volume picks up while industry peers act well. Stop – 46.5
The Covered Call Trade
Buy Delta Airlines (DAL) Stock at 54.5, Sell to Open November 55 Strike Calls (exp. 11/15) 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 54.4 for the stock and sell the call for 1.40, 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
| Stock Name and Symbol | Price Bought | Current Stock Price | Stop | Option - Price of Call Sold | Current Option Price |
| ON Holdings (ONON) | 51.9 | 48 | 43.5 | November 50 -- $4.92 | $2.00 |
| Robinhood (HOOD) | 26.2 | 27 | 22 | November 27 -- $1.90 | $2.20 |
The next Cabot Profit Booster issue will be published on October 29, 2024.
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