Southwest Airlines (LUV) - Near-term Call Accumulator on Ripping Vol

LUV is trading $11.66, down 1.0% with IV30™ up 11.3%. The LIVEVOL® Pro Summary is below.



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Southwest Airlines Co. (Southwest) is a passenger airline that provides scheduled air transportation in the United States.

The company has traded over 10,000 contracts on total daily average option volume of just 1,817. Calls have traded on a 6.4:1 ratio to puts with the action being in the Mar 12 calls -- over 8,000 have traded. The Stats Tab and Day's biggest trades snapshots are included (below).





The Options Tab (below) illustrates that the OI is rather large in the Mar 12 calls.



Using the Level II pop-out (below), we can see the OI has jumped as of yesterday (trades on 3-2-2011).



I've included the largest trades on 3-2-2011 in those calls (below).



So, my best guess is those are long -- the vol was up more than 6% as well. The trades today look like purchases and again the confirming circumstantial evidence is the vol pop. So, In English, it looks like someone is piling on a long position in the Mar 12 calls. Checking the OI tomorrow will be the ultimate test.

The Skew Tab snap (below) illustrates the vols by strike by month.



We can see the upside skew going into the 12 strike in Mar, and then even higher going into the Mar 13 strike. The vol drops off to the 13 strike in Apr.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).



A couple of notable phenomena:
1. IV30™ is ripping as of late.
2. The stock is around some near-term lows.

There was some news out today on US Airways and Alaska Airlines -- positive results for February traffic according to Forbes.com. You can read that article here:
US Airways, Alaska Airlines Soar On February Traffic Report

Possible Trades to Analyze
1. Trade the Mar skew
Buy the Mar 12/13 call spread for $0.20. This purchases 42 vol and sells 44 vol on those prices.

2. Tricky calendar:
Difficult to get these prices, but paying mid-market ($0.10) in the Apr 13 calls and hitting the bid ($0.05) in the Mar 13 calls pays $0.05 to own Apr upside. It's not the most exciting trade of all time, but it's worth analyzing.

3. Sell the elevated vol:
Since the IV30™ is popping, examining a vol sale may be worth some time.
Sell the Apr 12 straddle @ $0.70.
Buy the Apr 11/13 strangle for $0.20.
That yields a MaxGain:MaxLoss of 1:1.

4. Do nothing, see if this elevated vol trend continues and re-evaluate.

This is trade analysis, not a recommendation.

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