(This commentary originally appeared Friday on Real Money Pro. Click here to learn about this dynamic market information service for active traders.)
When hurricanes strike it's only natural to think about the near-term damage they will inflict on travel-related companies. Traders are quick to sell everything connected to the industry.
Wednesday morning saw that knee-jerk reaction in booking sites stocks like Trivago (TRVG) , Priceline (PCLN) and Expedia (EXPE) . Large drops also hit the three large cruise lines Carnival (CCL) , Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH) . Airlines, too were knocked back on flight cancelations and rescheduling woes.
Traders who like those names would be well served to do some buying, put writing or perhaps some of each on their favorite affected shares. Storm-related damage is generally short-lived. Business disruptions are planned for by experienced managements, which are well aware that these events happen now and then.
I chose to take advantage of the situation by selling some long-term (Jan. 2019 expiration date) puts on JetBlue (JBLU) which had dropped from a recent peak north of $24 to south of $19.
Before proceeding it's wise to reaffirm a reasonable target price. JetBlue has been a fine long-term grower. EPS expanded from $0.31-cents in 2010 to $2.22 in 2016. The shares flew as high as $27.40 late in 2015.
JBLU's average P/E since 2011 has run 13.3x. Bargain basement entry points (green-starred below) typically came at multiples ranging from 10.3x to 12.1x. Last summer's extreme sell-off took JBLU to an even lower level. That extreme plunge set it up for a quick 63.5% trading opportunity.
Assuming a conservative twelve P/E on JetBlue's 2018 estimate supports an end of next year goal price of $25 - $26. The hurricane-induced decline appears to offer 30% - 40% upside for those brave enough to buy while others are panicking.
The indicated target zone is quite achievable. JBLU peaked at $23.70 to $27.40 during each of the most recent three calendar years.
Option savvy traders can play JetBlue by selling January 2019 expiration date puts at strikes of $17, $20 or $22. The increased volatility now provides excellent option premiums on top of what looks like an already cheap share price.
It took the Ebola virus scare to push JBLU fleetingly to the $15 range during 2016. Getting paid $1.95 now, to commit to owning JBLU at $17 later, drops the worst-case, forced purchase price to very close to that "wish I'd bought back then" level.
Writing $17 or $20 puts at the indicated premiums would discount JBLU's "if exercised" purchase points by either 5.9% or 9.7% from the already beaten-up, trade inception price of $18.39.
Future stock market action can never be guaranteed. The 30-month chart below, however, shows how tiny a slice of the past 2.5-years owning JetBlue at $15.05 to $17.30 would have been a bad idea.
Well-defined and significant upside on a good operator seems to far outweigh the risk of a sustained decline. By the options' expiration date hurricane Irma will be a distant memory.
Buying JBLU shares offers unlimited upside but no downward protection. Selling puts allows for a margin of safety along with decent potential gains.
Buy some JetBlue shares, sell some puts or consider doing both.