Salomon Smith Barney is advising clients who believe that it will take several months for airline stocks to rebound to pre Sept. 11 levels to sell short-term calls on the companies. As the airlines continue to struggle to restore confidence in the traveling public, Ryan Gould, equity derivatives strategist in New York, recommends that clients sell short-term calls struck at or near pre-Sept. 11 levels. The calls mature anytime before September and have a premium of at least 5% of the notional value. The trade is aimed at money managers.
In an example trade a client could sell six-month calls on Continental Airlines with a strike at USD37.5 and a premium of 10% of the notional. The stock would have to recover approximately 70% from the price on Sept. 10 to reach the strike price. This level was chosen because it is unlikely to be reached but still generates a large premium. Shares in Continental closed at USD23.73 Wednesday. For investors who already own Continental stock, but do not believe a rally is in store in the near months, Gould recommends they sell the calls to overwrite their positions to earn premium while the stock recovers. Salomon chose a June maturity because it believes it will take at least six months for the public to rebuild its confidence in flying. Clients lose in this trade if they sell the calls and Continental stock rallies.
