Shares of United Continental Holdings (NYSE:UAL) are up nearly 25% thus far in 2012. However, there are three reasons why the stock can continue to rally.
Option Monster reported on the high level of bullish options activity recently: 3,300 May 24 calls were purchased against open interest of just 2,575 contracts. At the same time, an equal number of May 23 puts were sold. The large block trade likely represents institutional money. Institutional money is usually smarter, thus worth following. In summary, the recent options activity points to more upside ahead for United Continental in the short term.
Drop In Oil Prices
As shown by the five-day chart of the WTI oil tracking ETF United States Oil (NYSEARCA:USO), oil prices have dropped significantly over the past few days. The drop in oil prices is good for all airlines, including United Continental, because fuel prices are a major input costs for airlines.
Short interest in United Continental currently stands at 33.3 million shares, or 10% of the shares outstanding. This significant short interest represents the possibility for a squeeze higher as United Continental continues to rally. Short sellers are likely already starting to feel pressure to cover. As some short sellers begin to cover, it will only cause more pain for other short sellers.
While United Continental has done well so far in 2012, there are three reasons why the stock can continue to rally. The bullish options activity, decline in oil prices, and large short interest all point to a higher stock price.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.