Alaska Air Faces Hidden Risks Despite Strong Jobs Report

Alaska Air

While the recent robust September jobs report initially appears to bode well for companies like Alaska Air (NYSE:ALK), there are hidden risks that need consideration. With more people earning stable incomes, discretionary spending capacity increases. When combined with the confidence in a dependable workforce, the so-called “revenge travel” sentiment could potentially boost ALK stock.

It’s worth noting that 11 Wall Street analysts unanimously rate Alaska Air as a strong buy. Delving into quantifiable expectations, the average price target stands at $62.11, indicating a substantial 77% upside from the closing price of $35.07 on Friday. The highest target reaches $75, while the lowest target sits at $50, still representing a respectable 42.6% potential return.

However, the elevated expectations for ALK stock don’t paint the whole picture. When examining the Barchart Technical Opinion indicator, it delivers an 88% strong sell assessment, suggesting a decidedly bearish outlook for the short to medium-term cycles.

The long-term offers some hope, with a 50/50 odds ratio for pessimistic trading. This contrast is less than ideal, particularly when serious fundamental questions surround ALK stock. Earlier this year, Alaska Air lowered its revenue expectations for the third quarter during its Q2 earnings disclosure.

So, the question remains: Which version of Alaska Air will take flight?

Unusual options activity adds to the uncertainty surrounding ALK stock. Following the close of the October 6th session, Alaska Air’s derivatives garnered attention for unusual options volume. Total volume reached 13,301 contracts, compared to an open interest reading of 65,028. Notably, this represented a 502.67% increase in volume compared to the trailing one-month average.

Digging into the specifics, call volume amounted to 1,437 contracts, while put volume reached 11,864 contracts. This translated to a put/call volume ratio of 8.26, suggesting a bearish sentiment at first glance.

However, it’s essential not to jump to conclusions. Institutional traders may sometimes write (sell) put contracts to capitalize on heightened implied volatility or due to strong conviction that the underlying security won’t decline.

To better gauge the context, options flow data reveals that the last major transaction for ALK stock’s derivatives occurred on September 19th. Interestingly, this trade involved selling options of the October 20th, 2023 $35.00 Put, implying confidence in a floor at $35. Coincidentally, ALK stock closed at $35.07 on Friday.

This might instill some confidence in the bulls. Yet, exploring unusual options activity further, the surge in options volume on Friday was centered around the November 17th, 2023 $32.50 Put. With 5,782 contracts traded and open interest of only 94, this indicates a sudden demand for this previously overlooked options contract.

The evidence suggests that retail traders are driving this demand, and it’s a shrewd move considering the delta of the put has been trending toward -1. Those taking the opposite (long) side of the bet may be going against prevailing retail wisdom.

In conclusion, while a strong job report may seem like a blessing, it could be a harbinger of future challenges. The Federal Reserve’s actions will be closely watched, especially as it grapples with persistent inflation. If interest rates rise significantly, it could trigger a recession or hinder companies that benefited from easy monetary policies. This potential scenario may not favor ALK stock, explaining the sudden interest in put options.

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