Southwest Airlines’ upwardly revised guidance could trigger a short squeeze on the stock
Southwest Airlines Co (NYSE:LUV) stock is driving the New York Stock Exchange (NYSE) higher today, last seen up 10.3% to trade at $31.33. The airliner raised its third-quarter revenue forecast, while also authorizing a $2.5 billion share repurchase program. The news has pushed the entire airline sector firmly into the black today.
Southwest stock is on track for its best single session gain since 2020, and is trading at its highest level since a steep 14.9% bear gap on March 12. The shares have now reclaimed their year-to-date breakeven level, and have added 32% since their Aug. 5, 2024 low of $23.58.
Given the 16% year-over-year gain, a short squeeze could provide additional fuel. Short interest fell by 17% in the most recent reporting period, yet the 43.28 million shares sold short account for 7.3% of LUV’s total available float. At the stock’s average pace of trading, it would take shorts more than four trading days to buy back their bearish bets.
If this is the turning point for Southwest, overdue upgrades could also be imminent, considering 12 of the 17 brokerages in coverage maintain “hold” or worse ratings, while the consensus 12-month price target of $26.14 is now a 16.4% discount to the equity’s current perch.
Call traders are out in droves today. At last check, over 27,000 calls have changed hands, volume that’s eight times the average intraday amount and more than four times the number of puts traded. The weekly 9/27 30-strike call is the most popular, followed closely by the 29 strike in the same series.
Options are an intriguing route, per LUV’s Schaeffer’s Volatility Scorecard (SVS) that sits up at 90 (out of 100). This indicates the security has exceeded options traders’ volatility expectations over the past year, a boon for premium buyers.