Is The Airlines Industry Ready To Soar Again?

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Is The Airlines Industry Ready To Soar Again?

WEBSIM
18 May 2022

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Are airlines good investments right now?

The COVID-19 pandemic was in many ways a true «black swan» for many stock market sectors. The spate of ensuing lockdowns and government regulations tested the resiliency of many industries. In particular, the airlines industry was particularly hard-hit, as global travel grinded to a standstill amid strict quarantine and entry requirements imposed by many countries.

More than two years later, the airline industry has staged a rocky, tentative recovery. Year-to-date, the US Global Jets ETF (JETS) is still down over 10%. Skyrocketing commodities prices have depressed the margins of airline operators, forcing them to cut costs elsewhere or raise ticket prices to compensate. Consumer have been slow to return to pre-pandemic travel habits as soaring inflation and rising rates curbed household spending. Fears of an impending recession have also promoted many to tighten their budgets in anticipation.

Spotting market inefficiencies in the airlines industry

Still, the current high volatility (and arguably bear) market offers attentive investors some potent trading opportunities. Earlier on March 23rd, Leverage Shares Director Oktay Kavrak tweeted about the possibility of setting up a pairs trade using Boeing (BA) and Airbus (AIR).

Pair trades are a type of arbitrage involving involve long and short positions in two different stocks with a positive correlation. To initiate a pairs trade, a trader must first identify two historically correlated stocks that have recently diverged in performance.

Once this has been identified, the trader takes a long position in the underperforming stock and sells short the outperforming stock. Profiting from a pairs trade relies on both stocks converging on their historical correlation, as the underperforming stock appreciates, and the outperforming stock falls.

Below I’ve plotted a chart of Boeing and Airbus stock’s YTD performance. We see that around April 25th, both stocks diverged significantly, with Boeing underperforming and Airbus outperforming.

As of writing, Boeing and Airbus have a negative correlation of -0.39 based on YTD data. Historically, the correlation between both stocks has been significantly higher, at around 0.80 based over a trailing 10-year period from 2012 to present.

Instruments to use

Investors looking to set up a pairs trade should therefore go long in Boeing and short in Airbus. For the former, buying the ticket should be sufficient. However, gaining short exposure for the latter is a bit more complicated.

Shorting a stock requires the use of portfolio margin. This is risky as margin is subject to borrow rates (which are expected to go up as various central banks initiate interest rate hikes) and the ever-present danger of a margin call should the value of the shorted security suddenly skyrocket.

Investors can also go short via put options. However, this exposes an investor’s capital to theta decay (the rate at which an options premium loses value over time), and implied volatility (IV) crush (the loss in an options premium due to suddenly decreased volatility, typically after earning are released). Options also expire, so a degree of market timing is required which causes additional risk.

A better way of gaining short (or long exposure) is by using Leverage Share’s suite of exchange-traded products, which offer the potential for a higher risk/reward profile via built-in daily three times (3x) resetting leverage.

A hypothetical investor looking to initiate a pairs trade can therefore go long on Boeing with 3x leverage by buying BA3, while going short on Airbus with 3x leverage by buying AIRS.

The final word

Traders interested in deploying a pairs trade strategy for the aforementioned airline stocks can manage their risk exposure using ETPs like BA3 and AIRS.

The physically backed nature of both ETPs ensures good liquidity and a narrow bid-ask spread, allowing you to enter and exit positions easily. Your risk is also capped based on how many shares you hold, making position sizing easy (just buy and sell shares) compared to maintaining margin requirements or calculating options delta exposure.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Leverage Shares ETPs

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A Built-in Airbag to Limit Losses

Elaborado por

Tony Dong

mayo 18, 2022

Category: WEBSIM

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