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Good afternoon everybody. JD here with your Rational Trader market analysis daily.
In today’s video, I want to walk you through a mean reversion trade I’m eyeing ahead of earnings later this week — and the setup is shaping up a lot like last week’s STZ trade.
This one’s in Delta Airlines (DAL), and earnings are due out on Thursday before the market opens.
Why I’m Watching DAL
Right now, Delta is trading very close to its mean price — about $49.19.
This is what I call the “magnet of the mean” — and when a stock drifts into earnings already hugging that average, I start paying attention.
What the Options Market Is Pricing In
Implied volatility is elevated. The options market is currently pricing in about a 5.5% move in either direction on earnings.
But here’s the catch: last quarter, Delta had a huge 20% post-earnings move — and I think that’s skewing the implied volatility.
That was an outlier. If you remove that from the equation, the options are probably overpricing the actual risk.
Why I Like This Setup
Let’s do some simple stats:
- A 5.5% move up or down from the current price would land you just about two standard deviations above or below the mean.
- That puts the $54 call and the $46 put just outside that range — about 7.7% OTM in either direction.
That’s the kind of distance I look for when building a high-probability credit spread.
How I’d Structure the Trade
If I take this setup — and I probably will — I’d only do it as a defined-risk spread.
No naked positions.
Sell the $54 call and the $46 put, buy wings further out, and collect credit on the spread.
The idea is: Delta stays within the range, implied volatility collapses after earnings, and those extremes expire worthless.
Not Placing It Yet
Now to be clear — I haven’t placed this trade yet.
I’m watching it closely, and if pricing and positioning stay consistent, I’ll likely place it Wednesday afternoon, heading into the print.
But everything about it right now — the chart, the strikes, the volatility — says this could be a Cash Machine trade in the making.
Talk soon,
JD
The Rational Trader
JD
The Rational Trader
