The Reopening Trade Isn’t Dead

Hey Traders,

It has been an all-around wild week, and I don’t think anyone knows quite what to expect next…

Maybe that’s why the CBOE Volatility Index (Ticker: VIX) hasn’t dropped below 21 all week …

But did take a trip above 35!

And in times of uncertainty, I like to “follow the money” …

As in, follow the Big Money traders to see if they’ll lead me to clues about what’s coming next!

What message are they sending out this week?

Well, for one, it looks like reopening trades are back, baby!

But the question is …

Which way are we playing them?

Let’s take a look at a few interesting trades that crossed the tape this week, and see if we can decipher where Big Money thinks we’re headed next …

Carnival Corp. (Ticker: CCL):

The market attempted to stage a comeback on Monday, with the S&P 500 gaining 1.3%.

And cruise line CCL attempted a recovery as well, gaining 1.2% …

Which is nice, but hardly makes up for their Black Friday fall of nearly 11%!

While CCL was previously cruising above $20 less than one week ago, the shares closed out the day at $18.16.

(And – spoiler alert – things haven’t really looked up since!)

Now … what should we expect?

Are cruise line share prices destined to sink further, as the COVID storm rages on?

Or … could there be clear skies and smooth sailing ahead?

Well, according to one Big Money trader, the worst of the storm may be over … at least, for now.

This trader opened a bull put diagonal spread, selling 9,000 contracts of CCL’s December 3 19-strike put for $1.26, and bought the same number of December 23 15-strike puts for $0.38.

This trader is hoping CCL finishes above the strike of the sold put contracts – in this case, they’re giving CCL just a few weeks to recover some of its recent losses …

In which case, they’ll be able to keep the $792,000 premium collected.

So this is a bullish bet on cruise lines that we’re seeing here …

What do the rest of the pits say?

Well, besides being busier than usual (with 117% of CCL’s typical open interest!), it seems like the masses may agree with Smart Money’s bullish sentiment, as nearly 56% of those open contracts are calls.

American Airlines Group (Ticker: AAL)

As the market took a nosedive on Tuesday, airline AAL dove right along with it, unable to overcome the omicron headwinds that have been keeping the shares grounded (or worse).

Prior to the Black Friday sell-off, the shares were trading around $19.50 …

And they closed out this week at just $16.62.

How is Big Money playing this “reopening” name?

Well, on Tuesday, with the shares trading around $17.69, Big Money made a bet …

And it wasn’t exactly in favor of airlines, so much as hedging against a complete and utter collapse

This trader sold 13,333 contracts of the AAL January 2023 3-strike puts for $0.10.

That’s $133,330 they’ll be able to pocket assuming AAL doesn’t completely lose its marbles, and drop more than 80% within the next 13 months.

Another Big Money trader didn’t seem much more optimistic …

The very next day, on Wednesday, AAL plunged 8%, and Big Money made a big bearish move:

Just before the end of the day, one trader bought 40,000 contracts of the January 2022 17-strike puts, paying $2.23 each.

That’s a whopping $8,920,000 bet that AAL will continue to slip into the New Year. 

And even as markets recovered on Thursday, and AAL itself gained a solid 7%, the biggest Big Money plays were hardly a vote of confidence.

First, there were two blocks of 4,500 and 3,000 January 2023 10-strike puts sold to open for $0.96, or a grand total of $720,000.

This trader will be able to pocket the premium as long as AAL doesn’t drop more than 40% over the next year.

There were also two blocks of June 2022 14-strike puts sold to open, with the first block of 15,530 contracts sold for $1.42, while an additional 15,000 crossed the tape for $1.37 less than 30 minutes later. 

That’s a total of $4,234,700 premium received … but there’s far less wiggle-room here, with the 14-strike only about 15% out of the money.

These trades were sold to open, all separately executed, but potentially by the same one or two buyers …

Regardless of how many are participating, that’s more than $5 million total making a moderately-bullish-at-best bet on AAL, on it’s best trading day this week.

Overall, AAL pits are busier than usual, with 112% of their normal open interest …

But unfortunately, 62% of that is on the put-side.

Delta Air Lines (Ticker: DAL)

Like other airlines, DAL has been hit hard by the Black Friday sell-off, falling from pre-omicron levels near $40 to close this week at $35.98.

Are there any bulls boarding DAL’s flights?!

At least someone out there has a little bit of faith in the airline, with one trader cashing out a cool $1.1 million, betting that DAL will bridge the gap back to where it was trading just over a week ago …

Half an hour before the close on Wednesday, one trader bought 10,000 contracts of the February 2022 37-strike calls for $1.96, while also selling the same number of the February 2022 42-strike calls for $0.77. 

This reduced the outlay required to make this bullish bet by $770,000 to “only” $1,190,000.

This bull call spread tells me this trader is looking for DAL to move between $37 and $42 within the next three months or so …

That would close its recent gap lower, though it still keeps DAL below its early November high at $45.

And that wasn’t the only bullish bet on this airline.

(AAL is probably wondering what gives!)

Someone else is betting on some tailwinds …

Opening up 8,000 contracts of the December 37-strike calls for $1.47 during Thursday’s trading session. 

That’s a total of $1,176,000 spent on this bullish call buy!

That isn’t a vote in favor of total pre-omicron recovery … but it would certainly get DAL close to where it was trading before the variant made headlines.

Like AAL, DAL pits were busier than usual …

Open interest is at 124% of its usual amounts …

But unlike its competitor, DAL’s pits are call-skewed, with 765,930 calls open to just 550,129 puts.

Unfortunately, Smart Money seems as split as the rest of us about which way these reopening trades will go …

But it does signal to me that there is still money to be made playing the biggest reopening names.

I will be watching to make my move.

Your Only Option,

Mark Sebastian

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