Delta has outperformed since the Iran war began. Using options to hedge against losses
While the broader airline sector is weathering a storm of escalating costs and geopolitical fragmentation, Delta Air Lines (DAL) has managed to maintain an altitude that defies the market’s current gravitational pull. However, this divergence creates a precarious setup. Even net of Friday’s declines, DAL is still trading above $63 per share. Notably, that’s about where it was on December 1st of last year, when crude oil was well below $60/bbl. It has risen by nearly 70% since then. Peers like American Airlines (AAL) and Southwest (LUV) have seen their valuations compressed as the “Crack Spread Paradox” takes hold. This disconnect suggests that DAL is “priced for perfection” in an environment where the margin for error is rapidly evaporating. As crude has spiked since the war in the Middle East began, the real pain is felt by both businesses and consumers alike in the refined products or “at the pump.” Jet fuel prices have surged even more. As an example, consider the spot price of jet fuel in Singapore, which has risen nearly 180% off the lows just three months ago to more than $5.27/gallon as I write this. Delta is often touted as the “smartest guy in the room” because it owns the Trainer Refinery in Pennsylvania, which it bought from Phillips 66 in 2012. While this asset provides a “natural hedge” by capturing refining margins that hurt other carriers, it is not a panacea. That an airline would go into the energy business at all demonstrates how important fuel costs are to airlines. The good news is that the refinery protects Delta against the spread between crude and jet fuel – the spread between refined products and the price of crude is known as the “crack spread”, and that spread has been growing. The bad news is that it does not insulate them from the skyrocketing cost of the underlying crude itself. Delta management recently flagged a $400 million hit to fuel expenses for Q1 2026 alone. (source: Edward Bastian speaking at the JPMorgan Industrials conference this week, March 17th). While they’ve raised revenue guidance to compensate, counting on “record bookings” to outpace higher fuel is a dangerous game of chicken with consumer elasticity. Several airline CEOs have cited strong demand, and most have indicated they intend to raise prices to offset higher fuel costs, but consumers will already be feeling the pinch at the pump and at the checkout counter. Is it realistic to assume that demand dynamics will remain as strong as they were before the current war in the Middle East, after consumers and businesses start absorbing these costs in the coming months? The market is currently rewarding Delta for its “premiumization” strategy and its loyalty revenue from American Express , and the company does deserve a premium to most of the group, but saying it is less affected by industry pressures does not mean it is unaffected by them. Consider that since December 1st, JetBlue has fallen nearly 10%, United has fallen 11%, Air France/KLM has fallen more than 21%, and American has fallen more than 25%. Depending on the valuation metric one chooses, EV/EBITDA, P/E, P/BV, Delta now enjoys a 17%-26% premium to the group. The share price is also flirting with the 200dma. So what to do? For those who want (or need) exposure to the industry and feel Delta is the best house on a bad block, consider a hedge, such as a put spread collar. For example, one could use the May 57.5/62.5/5/72.5 put spread, financed by selling the upside 72.5 calls against a long stock position. Notice that would protect against a drop back to mid-late Q3 2025 levels. For those who might be considering going short DAL, a similar strategy might make some sense (without the long stock component of course) because one would not actually get short the stock at this level, but rather at $72.5, which is quite close to the 52-week highs, a level it would be hard for the stock to exceed unless the global geopolitical/energy crisis resolves soon, something most of us surely hope for, but hardly something to bank on. That trade would look like this. DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
<
