The S & P 500 is trading back at record highs, marking one of the sharpest comebacks in history, with the benchmark soaring more than 25% from its April 8 post- “liberation day” lows. For context, I’ve indicated the most recent period with a yellow arrow in a distribution of SPX returns since 1927. But the rising market has not helped all constituents return to their prior highs. For example, Delta Air Lines , which reports its quarterly earnings results next week, is still more than 25% below the February highs. Has the underperformance off the April lows led Delta to be underpriced? Certainly, the PE relative to the broad market has fallen and is now at the lower end of the two-year range. Why have airlines underperformed during the rebound? Some investors suspect that airline capacity is growing faster than demand. Most U.S. carriers’ capacity is expected to outpace GDP growth through the end of the year, which could increase competition for customers and pressure fares. United, Delta and American have been particularly aggressive in adding domestic seats, their largest market, which may negatively affect premium pricing. Fuel costs, one of the most significant expenses for airlines, have fallen recently. Fuel costs are expected to decrease to approximately $2.30 per gallon, potentially increasing operating profit by over 1%. However, rising wages may partially offset this, as labor expenses are forecast to increase by 7% year over year, which may more than offset lower fuel costs. The cost per available seat mile, excluding fuel, could rise by 2.7% to $13.50. The trade The options market is implying a move of more than 7% earnings-related after they report next week, and a $6 move — or around 12% — over the four following weeks ending Aug. 8. I’m inclined to take advantage of the recent underperformance to make a modestly bullish bet with a three-legged calendar spread as follows: Sell 1 Aug. 15 $55 call Buy 1 Dec. 19 $55 call Sell 1 Aug. 15 $45 put DISCLOSURES: None. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
