Options Corner: American Airlines Risks Turbulence Amid K-Shaped Economic Recovery

American Airlines Group Inc (NASDAQ:AAL) could be facing turbulent weather ahead if the earnings results of rival Delta Air Lines Inc (NYSE:DAL) have anything to say about it. Yesterday, Delta released its results for the fourth quarter and while the company beat expectations on both the top and bottom lines, DAL suffered a sizable drop. Subsequently, the downdraft also weighed on AAL stock, which dipped more than 2%.

One of the main culprits appears to be a so-called K-shaped recovery in both the airline sector and the broader economy. Essentially, much of the growth is concentrated on the upper arm of society — the folks who are willing and able to pay for premium services. However, because of the disruption of artificial intelligence, this arm may be longer but thinner due to fewer participants.

Major tech icons like Bill Gates have broadcasted what is already well-known: AI is displacing human labor because there's simply less need for it. And the displacement is not happening against plumbers and electricians, who are not necessarily the airlines' biggest consumer focus. No, they're impacting the white-collar professionals in finance, marketing, software, quality assurance…the list goes on.

Delta may be maximizing the premium market for the airliners and even then, it wasn't enough to lift its equity value. That doesn't leave much margin for error for American, which is why the skeptical view of AAL stock — at least in the near term — may be more prudent. The carrier simply doesn't have the same ability to compete in the premium realm as Delta.

Don't read this wrong: this isn't about shorting American or otherwise disliking the company. We just have to be realistic about what to expect next. And that brings up an intriguing opportunity for sentiment-agnostic traders.

AAL Stock Could Face A Bumpy Flight

In the trailing six months, AAL stock has gained over 21%. That's quite strong considering that DAL has moved up 17% during the same period. At the same time, the outsized performance may also leave AAL vulnerable to a correction, especially amid the K-shaped recovery of the airline sector. If Delta can't find its way out of the turbulence without incurring some red ink, American might not fare much better.

Of course, we can wax poetic about the ebb and flow of the market or we can look at actual empirical data. In the trailing 10 weeks, AAL stock has printed seven up weeks, naturally leading to an upward slope. Obviously, this shows strong momentum but in the face of an earnings reality check for one of the sector's leaders, there's a higher risk for a temporary pullback.

Under 7-3-U conditions (seven up, three down, upward slope), AAL's forward 10-week returns would be expected to range between $13.50 and $16 (assuming a spot price of $15). Overall, the character of the security shifts from neutral to slightly bullish over this two-month period.

However, if we were to look at 7-3-U conditions over the next five weeks, outcomes decisively shift into negative territory. Stated differently, if we viewed probability as a physical object, more of this probabilistic mass would materialize south of the current spot price.

To be quite upfront, estimating where AAL stock may fall over the next few weeks is a guessing game. There are simply too many variables to account for that any target would be statistically fragile, if not laughable. Nevertheless, what we can say with confidence is the distributional shift.

Following a period of extensive upside, AAL stock statistically tends to tilt southward before reverting to the mean. What I am proposing is a mechanism to capture this potential shift through a vertical options spread.

Bracing For A Rough Landing

Currently, AAL stock is trading hands at around $15. Given Delta's K-shaped earnings report, combined with AAL struggling to maintain its hot streak, a trip down to $14 over the next few weeks wouldn't be out of the question. As such, I'm looking at the 15/14 bear put spread expiring Feb. 20, 2026.

Under this wager, two simultaneous transactions will occur: buy the $15 put and sell the $14 put, for a net debit paid of $44 (the most that can be lost). Should AAL stock fall through the $14 strike at expiration, the maximum profit would be $56, a payout of over 127%. Breakeven would land at $14.56.

In looking at the overall risk topography of AAL stock under 7-3-U conditions, there will be a natural tendency for the security to cluster around the current spot price over the next 10 weeks. However, over the next five weeks, the clustering may occur around $14.70. What I'm betting on here is that Delta's earnings reality check will create a larger than anticipated shock, driving the price down to $14.

Certainly, it's a risk. Further, when American releases its earnings next week, there could be a chance for a positive surprise. But given what we're seeing in the market with one of the airline leaders, the optimistic view is arguably the riskier position. Therefore, the bear put spread seems tactically appropriate at this hour.

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