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Allegiant Air Could Provide a 68% Gain

Allegiant Air Could Provide a 68% Gain

Good news from a discount airline could create a trading opportunity. PR Newswire reported, Las Vegas-based Allegiant (Nasdaq: ALGT) is an integrated travel company with an airline at its heart, focused on connecting customers with premier leisure experiences – from vacations to hometown family entertainment.

Since 1999, Allegiant Air has linked travelers in small-to-medium cities to world-class vacation destinations with all-nonstop flights and industry-low average fares.

[The company recently] reported the following financial results for the third quarter 2019, as well as comparisons to the prior year:

“I couldn’t be happier about our post-fleet transition results with our third consecutive quarter of airline margin expansion,” stated Maurice J. Gallagher, Jr., chairman and CEO of Allegiant Travel Company.

“This is our 67th consecutive profitable quarter and we’ve nearly tripled EPS versus the same period a year ago, despite having eight fewer aircraft in the current fleet. Airline operating margin increased ten-plus points to almost 18 percent in the quarter.

Even without the year-over-year benefits from lower fuel cost per gallon, our airline operating margins would have been greater than 15 percent, almost twice as high as last year.

“We have discussed a number of times previously how our model post-transition will remain intact. After three full quarters, I am comfortable stating not only is it intact, it is actually better today than with the MD-80 fleet.

Our revenue per aircraft is greater, and we have the ability to fly profitably further down the off-peak curve, thereby allowing us greater fleet utilization both in our weekly cycle and in our peak months. As an example, our average daily block hour per aircraft in the past three years, 2016-2018 averaged 6.2 hours in Q3.

This year we averaged 7.4 hours, a 19.4 percent increase in utilization. We are in an excellent place in the history of the company. We have spent the past three-to-four years devising our current Allegiant 2.0 plan, and we are pacing nicely in the implementation. Our team members have been a critical component in the execution of the plan. We continue to excel in operational performance, number one in overall completion reported to date for the third quarter. Our product is our people, and it keeps getting better every day.  Hats off to all who produced a tremendous quarter during a very busy summer.”

Total cash and investments at September 30 were $442 million. Total debt declined from the second quarter to $1.4 billion.

We have 30 unencumbered aircraft. $81 million available under the revolving credit facility. Returned $14.7 million through share repurchases in the quarter – purchased at an average of $141.64 per share. Returned $11 million in dividends in the third quarter.

The stock jumped on the news.

ALGT daily chart

The weekly chart shows a long-term consolidation is possible and the breakout could lead to large gains.

ALGT weekly chart

 A Trade for Short Term Bulls

As with the ownership of any stock, buying ALGT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

bull call spread

Source: The Options Industry Council

Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for ALGT

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For ALGT, the December 20 options allow a trader to gain exposure to the stock.

A December 20 $165 call option can be bought for about $5.20 and the December 20 $170 call could be sold for about $2.23. This trade would cost $2.97 to open, or $297 since each contract covers 100 shares of stock.

The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

In this trade, the maximum loss would be equal to the amount spent to open the trade, or $297.

The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

For this trade in ALGT the maximum gain is $2.03 ($170- $165= $5; $5 – $2.97 = $2.03). This represents $203 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $297 to open this trade.

That is a potential gain of about 68% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.