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Traders Bet Merger Doesn't Drag Down US Airways

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September 11-strike puts sold on LCC today.

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Some investors apparently think that the official announcement that US Airways Group, Inc. (NYSE:LCC) will try and merge with AMR Corporation (PINK:AAMRQ), the company that operates American Airlines, won't drag down LCC's stock price over the long term.

One option seeing notable attention in this morning's action is the September 11 put. With 90% of the trades crossing at the bid price, and volume handily exceeding open interest as of 11:37 a.m. ET, it is likely that at least some of these puts were sold to open. That means investors are hoping LCC stays above $11 through the expiration date of September 20 so the contracts expire worthless and the traders can pocket the premium collected, a volume-weighted average price (VWAP) of $1.09. To breach that strike, LCC would have to drop nearly 21% from current levels. If the stock does move below that price, the investors would likely be required to purchase LCC shares at $11 to fulfill their obligation to the put buyers.

The boards for both LCC and AAMRQ officially agreed late Wednesday to push through with the proposed merger, which has been in the works for several months. American is in Chapter 11 bankruptcy protection, and the pairing has been pushed by its creditors and employees. LCC's stock is off 5.3% this morning on the news, but has been on an overall upswing as of late. It's higher for the current calendar year and is up nearly 55% year over year as it put the vestiges of its last merger with America West in the rearview mirror. Plus, it's beating the S&P 500 Index (INDEXSP:.INX) by 11.5 percentage points over the last three months.

The stock's Schaeffer's put/call open interest ratio (SOIR) stands at 0.30, and that's only 6 percentage points above an annual low, compared to similar readings in the last 12 months. That means that traders have rarely been so put-averse toward short-term options (that expire in the next three months). But the equity's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 0.79, and that's higher than 71% of other readings in the last year -- meaning shorter-term traders are becoming more bearish and are buying to open puts at an accelerated clip.

This article by James Pilcher was originally published on Schaeffer's Investment Research.

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