Air Carrier's Recent Reversal Points To A Bear Call Spread

United Airlines (UAL) stock reversed lower on Wednesday after initially gapping up on higher revenue projections. That kind of bullish-to-bearish reversal could indicate further weakness ahead for the airline, in which case a bear call spread could work well.

A bear call spread, similar to this idea from last week, could be a great way to trade on the view that upside in United Airlines stock is limited.

				    ↑
					X

This video file cannot be played.(Error Code: 102630)

								What Is A Bear Call Spread?
							

							

								See All Videos
							

						

					
					
						NOW PLAYING
						What Is A Bear Call Spread?

This assumes United Airlines will fail to get back above 100 in the next few weeks. The trade involves selling an out-of-the-money call and buying a further out-of-the-money call.

Bear call spreads can be a good way to potentially generate some income while a stock experiences a downtrend. The strategy can be profitable if the stock trades lower, sideways, or even it trades slightly higher, as long as it stays below the short call at expiration.

What Maximum Gains, Losses Are

An April 17 expiration bear call spread on United Airlines stock using strike prices of 100 to 105 goes for around $1.35 a share. Traders selling the spread would receive $135 in option premium on a 100-share contract, which is also the maximum possible gain. The maximum loss would be $365.

That represents a potential return of 36.9% between now and April 17.

The spread will achieve the maximum profit if United Airlines stock closes below 100 on April 17. In this case, the entire spread expires worthless, allowing the trader to keep the $135 option premium. The maximum loss occurs if United Airlines closes above 105 on April 17. In this case, the premium seller loses $365 on the trade.

While some option trades carry the risk of unlimited losses, a bear call spread remains risk-defined for United Airlines. That means you always know the worst-case scenario in advance.

A stop loss could be set if United Airlines stock trades above 100. That’s roughly the current level of the 200-day moving average. An alternative stop loss could be placed if the spread value rises from $1.35 to $2.70.

Ratings For United Airlines Stock

Investor’s Business Daily gives United Airlines stock a Composite Rating of 60 out of a best-possible 99, an Earnings Per Share Rating of 63 and a Relative Strength Rating of 42. According to IBD Stock Checkup, United Airlines ranks eighth in its group.

United Airlines faces mounting pressure from rising labor costs, ongoing operational challenges, and a heavy capital expenditure cycle. The latter could squeeze margins just as demand shows signs of normalizing.

With the stock pricing in a best‑case recovery scenario, any slowdown in premium travel, macro softness, or disruption to its aggressive fleet‑expansion plans could leave the air carrier vulnerable to further downside.

Please remember that options are risky, and investors can lose 100% of their investment.

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

Gavin McMaster has a master’s in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.

YOU MIGHT ALSO LIKE:

Gold Stock Stabilization Creates Opening For Ownership At A Discount

Seagate Stock Volatility Sets Up This Strategy To Generate A Return

Amid Market Volatility, This Spread Bets Against Emerging Markets

Transform Microsoft Stock Weakness Into A $1,700 Payoff With A Butterfly Trade

Adobe Stock Under Heavy Pressure. Here’s How To Take Advantage.