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Traders bet on cloudy skies for airlines

Airline stocks have been hitting some turbulence and now traders are taking bets that at least one carrier could see more downside ahead.

The NYSE Arca Airline Index fell 9 percent in the past week after Southwest said it was going to increase seat capacity by up to 8 percent this year and up to 7 percent next year. Though that may help margins, such moves tend to worry investors because it means the airlines might lower ticket prices to fill the additional seats.

Not only did Southwest see a double-digit percentage drop in its stock price in the last few days, but so did other major carriers like Delta, American, United and JetBlue. And it was in JetBlue that one trader took on a bet against the airline that paid off in only a matter of hours.

On Tuesday, when bearish bets against JetBlue were seven times their average, the trader bought 6,500 of the 22-strike July puts for $2.06 each. As each contract controls 100 shares, the trader is betting more than $1.3 million that JetBlue's stock will trade below $19.94 within the next two months. A put is a bearish bet giving the purchaser the right to sell a stock at a set price within a given time frame.

The trade, which took place early in the day, was well-timed. Though the option's strike price of $22 was already above where JetBlue shares opened, the stock spent much of the day falling and closed at $19.56.

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Meanwhile, the price of the options went up. By Tuesday's close, the July 22-strike puts were at $2.25, meaning the trader saw a 9 percent gain in the position's value.

According to options expert Mike Khouw, puts in airline stocks offer downside protection even if the fundamentals might make the sector look appealing.

"Some of these do remain kind of cheap and maybe attractively priced," Khouw said. "Buying puts is a good way to insure them, though, if you're concerned about further downside."

Last Thursday, Goldman Sachs analyst Tom Kim reiterated his upbeat outlook on the sector in the face of falling stock prices. "While we expect concerns around pricing to continue to pressure shares, current valuations should provide support," he wrote. "The industry's earnings power, high free cash flows, reduced financial leverage and capital returns offer a compelling risk/reward."

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