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Record Bullishness on US Airways Driven by Demand, Oil Dropping

Options traders betting US Airways Group Inc. shares will rally more than 39 percent in two weeks have helped boost bullish wagers to a record as greater travel demand lets the carrier boost fares and oil prices fall.

The ratio of outstanding calls, which give the right to buy shares, versus puts to sell jumped by almost two-thirds last month to 5.8 and reached 5.9 on June 21, the highest since the shares began trading in 2005. July $12 calls saw the fastest growth in new positions during June, and there are now more of those calls than any others -- 71,110 contracts out of total open interest of 215,233, Bloomberg data show. The smallest U.S. full-fare carrier has risen 78 percent to $8.61 in 2010.

Delta Air Lines Inc. Chief Executive Officer Richard Anderson said yesterday the industry is in an “up cycle.” Oil lost 4.7 percent since Dec. 31 for the first drop in the January-through-June period in seven years, helping US Airways because it’s the only major U.S. carrier that stopped hedging against higher jet-fuel costs. US Airways planes were 82.9 percent full in May, a record for that month.

“People are looking for the stock to go substantially higher in the next two weeks,” said Ophir Gottlieb, a trader and head of client services at Livevol Inc., a San Francisco-based provider of options market data and analytics. “It’s extremely rare to see calls so far out of the money where the open interest is so large relative to the rest of the open interest.”

The surge in shares of Tempe, Arizona-based US Airways this year has given it the best performance among 12 stocks in the Bloomberg U.S. Airlines Index.

Not Since 2008

Open interest for July $12 calls on US Airways has jumped from three on May 27, when the first contracts were created. January 2011 $10 calls are the second most-owned, with 27,077 existing positions. Calls account for 8 of the 10 largest open interest levels. US Airways July $12 calls trade for 9 cents, meaning the shares must rise to $12.09 before expiration on July 16 for an options purchase to break even. US Airways hasn’t closed above $12 since March 2008.

Jim Olson, a spokesman for the US Airways, said the company doesn’t comment on the trading of its securities.

“They have little to no hedging and higher oil prices haven’t come to pass, so that’s a tailwind to earnings,” said Blaze Tankersley, who is recommending the shares to clients as chief market strategist at Bay Crest Partners LLC in New York. “We’re in the midst of an industry upturn. You’ve had a return of business and leisure travel over the past year.”

‘Buy’ Ratings

James Higgins, a Soleil Securities analyst, started coverage of the carrier with a “buy” rating and $12 share-price forecast on June 29. Stifel Nicolaus & Co. analyst Hunter Keay initiated the company with a “buy” rating and $15 share-price forecast on June 10, saying the company “is poised to return to solid profitability in 2010.” JPMorgan Chase & Co.’s Jamie Baker upgraded US Airways to “overweight” in May.

US Airways will post earnings excluding some items of $2 a share in 2010, ending two years of losses, according to the average analyst estimate in a Bloomberg survey. US Airways reported an increase of as much as 18 percent in revenue for each seat flown a mile for May.

“The revenue environment continues to improve,” US Airways President Scott Kirby said at a conference on June 15. “We’ve seen dramatic recovery in the business travel.”

Crude oil for August delivery dropped 0.4 percent to $75.63 a barrel in New York yesterday, the lowest settlement price since June 14.

US Airways hasn’t entered into any fuel hedging transactions since the third quarter of 2008 and doesn’t have any existing hedges, the company said after its last earnings report on April 27.

“We feel pretty good about that decision,” Kirby said June 15. “We might change it at some point but at least in the near-term expect to remain unhedged and exposed to fuel. And recently, that’s been a very good thing for us to do.”

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