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http://www.options-trading-education.com/4419/buy-puts-on-airline-stocks/ - Buy Puts on Airline Stocks - As energy costs inch ever higher it might be a good time to buy puts on airline stocks as well as car makers. The basic concern is that economic growth throughout the world is still in question, even after the most recent progress in the European debt crisis. Despite the Euro Zone recovery having assured that Greece will not fail to pay its bills in March, the austerity measures being taken on across the European continent are expected to lead the EU back into a recession this year. The European Union as a whole is an economy of the same size as the United States. If the EU is not buying things due to a recession the effects will be global. Chinese production is already down. Although the US is slowly but surely recovering, progress is slow. Uncertainty in the Middle East and South Asia with the Iranian nuclear crisis has oil traders concerned and prices are up. For the options trader the point is to anticipate which stocks will fall and which will rise due to current and anticipated events. Higher energy costs may well slow economic recovery which will affect companies across the board. But, the reason to buy puts on airline stocks would be if on expects higher fuel costs to eat into airlines already tenuous profits.
Across the globe airlines have taken a hit recently. Korean Airlines fell about five percent recently while other Asian carriers (Thai Airways, Eva Airways and China Airlines of Taiwan) have fallen as well. Of course American Airlines in the USA has sought bankruptcy protection. United Continental Holdings have dropped $5 or 20% of share price in the last month and Delta has fallen by more than $2, also 20% or more of share value. It would have been nice to buy puts on airline stocks a month ago. However, these stocks may still fall in price if energy prices drag on faltering economies worldwide and rob airline of essential profits. Profitable options trading has to do with anticipation of events based on what is known today.
An always useful aspect of options trading, whether you want to buy puts on airline stocks or are thinking of buying puts on SAP is that risk is limited to the price of the options contract. On the other hand, for those selling options the risk may be greater as stock prices may change in multiples of contract price. For those who sell calls on a stock that they own the risk is that they will lose out on a surge in stock price. For those who sell puts on stocks that they own they may lose a substantial portion of their stock value in a big correction. Our discussion about whether or not to buy puts on airline stocks is merely an example of thinking through an options trade. Traders should always do their fundamental and technical analysis before trading and never enter into a trade that they do not understand.