Is Air Canada Stock About To Take Flight?

I was reviewing the most active options widget found on the M-X website and came across Air Canada (TSE:AC). Unusual or increased options activity can indicate the potential for some action in the underlying stock.

My next step was to take a look at the news to see if there was any indication as to why there might be an increased interest in the shares. Interestingly enough, CNW Group, a news wire company, published a story entitled “Air Canada Buys Back 3,185,735 Shares at a Total Cost of 36.7 Million” Read full story here. This article was picked up by the likes of Yahoo Finance, MarketWatch and several other outlets.

Below is the quote that likely moved investors to act:

“Air Canada believes that, from time to time, the market price of its Shares may not fully reflect the underlying value of its business and future prospects. In such circumstances, Air Canada may purchase for cancellation outstanding Shares, thereby benefiting all shareholders by increasing the underlying value of the remaining Shares.” Source: Isabelle Arthur of Air Canada Corporate Finance

While the number shares repurchased only represents about 3.49% of shares outstanding, this kind of corporate action can lead to greater investor confidence and a subsequent interest in owning the shares.

When a story that centers around corporate fundamentals suggests an opportunity, I always like to add credibility by comparing the technicals. Afterall, we are dealing in a world of probabilities so the more evidence supporting a directional bias, the higher the probability that there will be a follow through.

With this in mind, the below chart does offer some evidence of a bullish opportunity as indicated by my annotations:

1. Support at long term major trend line
2. Break above 200 bar moving average
3. Bullish flag forming (wait for break above upper trend line to confirm)

Given the general or systematic risk in the market these days, using a call option to take a shot at the possibility of move higher is a great strategy. If shares of Air Canada (TSE:AC) continue higher, the investor can benefit from the increased value in the option or exercise their right to own the shares at the strike price selected…provided the stock is trading above it. However, if Air Canada shares fall victim to broader market weakness, the loss on the call option is defined and limited to the premium paid. Unlike the owner of the shares who assumes an unidentifiable and unlimited risk should the shares decline in value.

For example,

With the shares currently trading at $12.10, an investor could purchase a January 2016 call with a strike price of $12.00. The Ask price for the call is $1.65. This represents the maximum risk on the position. The break even on the trade is reach when the shares are trading at $13.65. This is determined by simply adding the cost of the call to the strike price. The investors expectation should be that the shares will be trading above this level. According to the Financial Times, the average 12 month price target of analysts polled is $18.13 See full details here. Remember, this is no guarantee, but does offer some insight.

To conclude, the most active options “widget” found on the M-X.ca home page is a great resource for ideas. However, you need to do your homework to ensure that the company fundamentals and further technical analysis support taking action.