Friday, June 22, 2012

LCC: Breakout chart

US Airways Group Inc. (LCC) is the world's 10th largest airline, measured by number of passengers carried. The Tempe, Arizona company has more than 3,100 flights daily to more than 200 destinations in the Americas, Europe and the Middle East.

LCC has been on the rise since November 2011, but the chart was ambiguous. My primary interpretation was that it was part of a large sideways structure dating back to the depths of the recession, with a ceiling of around $12.

This week LCC shattered the ceiling, although rather gently, and reached a swing high Thursday of $13.78. With that move, the chart can be interpreted as a long-term uptrend.

As I write, the price is $12.98, within the fair price range, which contains 68.2% of trades over the last five days surrounding the most-traded price of $12.72. There are also volume spikes between $13.39 and $13.48, indicating levels where both buyers and sellers see advantage in trading.

US Airways has a ridiculous return on equity of 276%, with an equally ridiculous long-term debt level amounting to 22 times equity.

Institutions own 90% of shares, which are priced at bargain basement levels: It takes only 16 cents in shares to control a dollar in sales.

Earnings are like a busy airport, with both take-offs and landings. Reviewing the last 11 quarters, it runs three losses, three profitable quarters, another loss, three profitables, and then a loss in the most recent quarter. Each quarter, whether profitable or not, showed an upside earnings surprise.

Anyone looking for earnings acceleration should search elsewhere.

LCC on average trades 9.4 million shares a day.

The options selection is excellent, with high open interest and narrow bid/ask spreads.

Implied volatility stands a 84%, in the lower half of the six-month range. Options pricing implies confidence that 68.2% of trades over the next month will fall between $11.46 and $14.50, for a gain or loss of 12%.

US Airways next publishes earnings on July 23.

Decision for my account: I've opened a bull position on LCC. I like the chart. The earnings pattern? Not so much. I don't want to hold LCC over an earnings announcement, so I've structured the position as a bull put spread expiring in July, short the $13 put and long the $10 put. This gets me out before earnings, and also puts me in a position that is profitable down to about $12.25. If the stock were to fall to that level, then the rationale behind the position would no longer be valid and I would want to close it.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment