Washington and Tehran appear to have reached an agreement. Importantly, the framework being discussed would free up Iranian funds, allow the Strait of Hormuz to reopen, allow Iran to sell oil freely, and start nuclear negotiations.
What the news is causing is crude oil price A drop to its lowest level since April is good news for airline investors. The equation is simple. More oil passing through the strait means more supply, and more supply eases the price of jet fuel. This is structurally bullish considering jet fuel is one of the largest operating costs for airlines.
Airline stocks are rising on Monday, US Global Jets ETF (JETS) It is about to hit a new high for this year.
But being structurally bullish and being able to take action quickly on the long side are two very different things. IATA expects the sector’s total fuel costs to jump by $98 billion this year, which is expected to roughly halve global airline industry profits. These excess costs won’t disappear overnight just because diplomats shake hands. Jet fuel is a spot commodity, and it will take time for the spot market to normalize even after the Strait reopens. Consider that the disruption has now been going on for three and a half months.
The JETS chart, on the other hand, tells an interesting story. First, Friday’s closing price was the highest since the war, suggesting investors were hoping for some kind of resolution. However, it stands to reason that the early February high could be a resistance level representing the pre-conflict ceiling before the Hormuz crisis dragged down prices across the sector. The height in front of it is the ceiling of memory. The buyers who bought up there may now become sellers as we get back to business.
US Global Jets ETF, 1 year
Yes, DAL hitting new highs is a genuine counterpoint. Delta Airlines earns superior performance. It has the least exposure to fuels among the majors on a hedged basis and the strongest balance sheet. But just because one stock makes a new high doesn’t mean the entire sector is cleared. JETS is concentrated, with DAL, AAL, UAL, and Southwest accounting for approximately 44% of the fund, with the remaining members still operating within a high cost structure.
Trade:
Sell a 1-month strangle on JETS such as July 27/33 (approximately $27 put/approximately $33 call) for a total premium of $1.25 upon execution. Maximum profit $125 per contract Maximum loss: Unlimited Skill level: Advanced
Note that we selected these strikes assuming JETS would open significantly higher than Friday’s closing price. Either way, the stranglehold will likely sell the Jets at a higher level than they were before the war and buy them at a lower level than they were trading at just before the deal was announced.
The goal of the trade is to keep the “JETS” stock above $27 and below $33 by expiration, allowing you to pocket the entire premium. Papers are limited in scope and without direction. Geopolitical catalysts are partially factored in. Reducing fuel costs is realistic, but slow. And the technical situation points to a reliable ceiling for the February high. The rise in implied volatility following the diplomatic whiplash from Iran and the US means we are selling a premium on attractive implied volatility relative to the moves that are likely to materialize over the next 30 days.
It is important to note that unless you enter this trade against a long position, you are effectively selling the stock short beyond the strike price of that call and face unlimited risk. Therefore, this position always requires attention. It is also important to note that shorting the put will tie up your margin and put you at risk of buying ‘JETS’ stock at $27.
