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Morning Update


Friday there was unusual options activity in DAL (Delta Airlines). One trader bought 20,000 March 11 calls for $0.50 with the stock at 9.10 at the time. This trade cost $1 million in premium and is a very bullish bet on the stock. If DAL is above 11.50 at March expiration (165 days) this trade will break even. If DAL is below 11 at expiration, the calls will expire worthless and the trader will lose the entire premium paid for them.
One reason to be bullish on DAL is the company’s acquisition of its own oil refinery in May. This deal has since closed and its affects will be seen in Delta’s 4th quarter profits. Delta says that owning its own refinery is less expensive than hedging their fuel costs and will save them $100-300 million annually going forward. Delta has said they do not expect crack spread growth to abate “anytime soon”. The crack spread is price difference refiners earn between gasoline and crude oil. By owning their own refinery Delta can actually profit from a wide crack spread while its competitors are being hurt. Additionally, Delta’s passenger unit revenues are up and the company is on track to meet aggressive debt reduction goals by 2013.
Delta’s management has clearly been working hard to strategically position the company for growth, and now it appears it is time for that to pay off. Buying out of the money calls is a good way to get exposure to the stock while keeping risk limited, which is especially important in the highly volatile airlines sector.
Another stock with heavy options activity on Friday was FEZ, the Euro Stoxx 50 ETF. We saw a trader buy 6,764 Oct. 32 calls for $0.40 with the ETF trading at 31.00. This is a bullish bet that the ETF will rise 4.5% in the coming 18 days. This ETF was down 8% over the past two weeks as protests rocked Spain and fears of the Euro crisis intensified again. This trader is betting that the market will shake those fears and continue its upward trend throughout October, making this an excellent buying opportunity.

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