Options Trade of The Day: Southwest Airlines (LUV)

One of the most interesting “smart money” trades we came across yesterday was with Southwest Airlines Co (NYSE: LUV).

If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:

  1. Which direction the trader thinks the stock is headed
  2. How much they think it will rise (or fall), and
  3. In what time frame this will all happen.

If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…

A Pro Trader Just Bet $1,165,200 that LUV Will Continue to Climb in the Next 5 Weeks

On Monday, October 11, 2021, a pro trader seems to have bought 1,942 of the November 19, 2021, $47.50 call options on LUV for $6.00 per share. Her outlay was $1,165,200. 

LUV – Option Trade

The trade’s breakeven point is at $53.50, meaning that LUV needs to rise to $53.50 for the call option trade to break even. This is a nearly 4% return from the stock’s previous close of $51.67. And then for every $1 the stock rises above $53.50, our “smart money” trader will make $194,200!

On analyzing the daily chart of LUV, the stock seems to have broken out of a flag pattern (marked as pink color lines). This breakout level would now act as a strong support area. The stock is also trading above a strong long-term support area (marked as a green color dotted line), which would now act as an additional level of support for the stock. LUV is also above its 50-day moving average. All this makes it likely our pro trader is bullish on LUV.

LUV – Daily Chart

This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.

If you agree and would like to mimic this trade, here’s how:

Buy to open the November 19, 2021, $47.50 call options on LUV for $6.00 or better.

As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.

Happy Trading!

— Trades of The Day Research Team

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