• Bocconi Students Options Club

Protective Put and Stock : EasyJet

Updated: May 2

DISCLAIMER:

This association and its publications are solely intended for academic purposes and should not be used as investment advice or be interpreted as such.


The Company:

EasyJet plc is a British airline group operating mainly in Europe and as a low-cost carrier. The company was founded in 1995 and is based at Luton International Airport in London. EasyJet has grown thanks to numerous strategic acquisitions and the market deregulation within the budget airline sector, today it employs 14.000 people, operates in over 30 countries and 1.000 routes. EasyJet has five well defined strategic priorities:


  1. Number one or two in primary airports: as well as with other low-cost carriers, EasyJet also competes with legacy airlines and chartered carriers in primary airports

  2. Winning our customers’ loyalty: making airline travel increasingly easy as well as continuously increasing the offer of routes

  3. Value by efficiency: at its roots a low-cost carrier; it is also able to do so having an all-Airbus fleet reducing costs and providing for an easier servicing

  4. The right people: recruiting the right people and listening to employee feedback through its own platform, Peakon

  5. Innovating with data: using the millions of data points available to effectively be a data-driven airline


Firm Activities and Position:

EasyJet’s market share in the low-cost carrier business has increased in the last decade or so, at about 1% per year (~23% in 2009 to ~33% in 2019). As most of the airline business, EasyJet has greatly suffered the Covid-19 pandemic, leading to substantial financial losses as well as closing 3 UK bases during 2020. At the same time the company has also taken a strong sustainability strategy, setting up a dedicated team and management system to become carbon neutral by 2050.


The company is listed on the London Stock Exchange (EZJ.L) and has a market capitalization of €4.548B (21/3/21). Passenger revenues account for ~75% of total revenues (where ancillary revenues make up the rest) meaning the great reduction in flights for 2020 has had a severe impact. In fact, these have sharply decreased for 2020 compared to the year prior, leading to a £1,079B loss for FY 2020 whereas FY 2019 resulted in a £349M profit. The company however has a positive outlook, and the rolling out of vaccines and ease on travel restrictions could mean that EasyJet could be profitable again as soon as FY 2021.


Ratios:

Analyzing the ratios, it is hard to deduce significant conclusions on the position of EasyJet in the industry, at least for the time being. Looking at any airline we can see how the data for 2020 was heavily skewed because of the pandemic’s profound effects on the entire sector. What this means is that it is hard to assess the profitability of the firm against its peers for the year of 2020, although the beta (volatility) was around the same as the airline industry’s average. In terms of profitability figures are well into the negative territory, but as mentioned this was the case with virtually all airline stocks and firms due to the unprecedented measures which led to airline fleets being grounded for months.


Motivation:

As mentioned, EasyJet is an interesting low-cost airline thanks to its ability to compete both with other low-cost airlines such as Ryanair, but also with more established and larger airlines such as Air France or Lufthansa on larger airports and routes. Similarly to the entire industry, EZJ has also suffered substantial losses due to the Covid-19 pandemic, however it has shown already signs of recovery. The loan granted by the UK government of $1.87B dollars is for sure a positive catalyst for the company, making it able to survive for an even greater amount of time if travel restrictions were to get worse. However, with the rollout of vaccines throughout Europe and the rest of the world, the most likely scenario is an ease of travel restrictions especially during this summer, with many destinations labeling themselves as “Covid free” and allowing travelers holding a “vaccine passport”. Therefore, we see the price recovering to its pre-pandemic levels, as it has done in the last few months with a 23% increase YTD, and see even greater growth on a longer, one-year outlook.


Technical Analysis:

The best time frame for this play would be from now until the expiration on June 18 of the put options. This gives the possibility for the airline to at least partly recover with the summer holidays and publish its 2021 interim results (projected for May 18th).


As previously mentioned, the possibility for the airline sector to suffer further at least until later this year is concrete, and therefore it is necessary to protect the long position on the company with a put option. Moreover, target prices sit around the current (29/03) market price of £940, therefore a put option with strike price at £900 (4% under the current market price) would seem like a reasonable target if the price was to start a declining trend.


The Play:

Using technical indicators, we can see that EasyJet’s stock looks neutral with respect to both the RSI and Bollinger Bands. Moreover, in terms of volatility the price looks to be quite stable, with the historical volatility indicator sitting around 0.7.


Therefore, what we believe to be the best move is employing a protective put, buying the underlying asset at the current stock price as well as a put with strike price at 900 and expiration on June 18.


Structure:

The protective put is made up of two components:

• Underlying stock

• June 18 put option (strike = 900, premium = 62.5)


Profit & Loss:

Holding the company’s stock, we have that profit is theoretically infinite as the upside on the stock price is not bounded. From the difference in the current price and the one initially paid we must subtract the premium paid of the put option which will not be exercised if the price is to remain above the strike price. On the other hand, loss incurred is calculated by the difference of the initial stock price and the current one, the premium paid for the option and taking into consideration the profit of the put option when exercised at 900. There is however, one more case to consider, that is if the price was to oscillate between the one initially paid for the stock and the strike price of the put option, in that case we may incur a loss resulting from the premium paid as well as the loss on the difference in price. Lastly, the breakeven point (BEP) would be at the initial stock price + 62.5 (option premium).


Considering the possible scenarios occurring on the short term, until the option’s expiration date, we have that the interim results of May could lead to a favorable outlook for the company, indicating signs of recovery and therefore lead to a positive increase in the stock price, case in which the option will not be exercised, and profit will occur after hitting the BEP. Another case to consider is whether further restrictions are imposed on travel, especially for the summer. With EasyJet being a European low-cost company, it significantly relies on summer holidays for its profit, where people are seeking the cheapest and most available flights. If restrictions of this kind are imposed, we may see a negative impact on the stock price, similarly to most other airline companies, a case in which our put option would hedge us against. Third option is the implementation of the so-called “vaccine passports”. What this means is that only vaccinated people, holding a certificate to their status, would be able to travel. In this case we could have some ambiguous effects on the Company’s stock price; on one hand it indicates an at least partial return to flying, on the other hand however, the number of people flying would be greatly reduced by the necessity to hold a “vaccine passport” to travel, especially if these suffer further delays or are uneven throughout Europe. Therefore, as previously mentioned, we could see an oscillation of the price between the initial one and the option’s strike price.

Greeks


To evaluate greeks of the protective put, we need to split it into the sum of a long stock and a long put strategy. Delta will always be positive, since the delta of a long stock is equal to 1 and the delta of a put option is between -1 and 0. Gamma and Vega are positive and equal to the put’s ones since these greeks are equal to 0 for a long stock, the same for Theta specularly.


Delta:

Gamma:

Vega:

Theta:


Pros:

What this strategy gives us is a good protection from a downward-trending price while at the same time yielding a profit (to which only the option premium is subtracted) if the stock price was to increase. A positive movement can be further supported by the positive catalysts which have the possibility to set the Company back in profit and give investors a good outlook for the future. The fact that an interim earnings report is to be published in May, gives us the possibility to witness a positive movement in EasyJet’s stock price, gradually back to its pre-pandemic level.


Cons:

Although the current situation has certainly improved compared to last year, the airline industry is probably one of the last industries to get back on its feet due to its sensitivity to the pandemic-induced travel crisis. As mentioned in the strategy we could also witness a case in which EasyJet’s price remains stable well into this year and therefore our strategy would result in a break-even if not negative profit. The stock price has also seen a good YTD return (almost 30%) possibly indicating that the positive information regarding the airline itself but the economy as a whole, are already priced in and therefore the short run price increase has “exhausted”.