Flying High with Delta: Generating Interest-Free Income with Covered Calls

How I Leveraged Covered Calls on Delta Airlines to Boost My Portfolio Returns

There is nothing quite like a little equity analysis to get your mind refreshed after a long weekend (long because I watched my Indiana Hoosiers lay an egg at Ohio State in person). Life goes on, and so does the market.

Roth IRA & Delta Airlines

Today, I dove into my Roth IRA account, which has been performing exceptionally well lately. If you don’t have one already and enjoy the liberty of picking your own portfolio, I’d strongly consider opening one today. You direct 100% of your investments tax-free forever, meaning that all future growth and withdrawals in retirement are completely free from taxes.

The most notable name driving my portfolio lately is Delta Airlines. The stock is up 59% in just four months since I initiated my position. It has now reached my price targets for the year, prompting me to consider selling covered calls to lock in gains.

Initial Interest in Delta Airlines

Delta Airlines (DAL) first caught my attention at the beginning of the year—not by stock charts or analysis, but by word of mouth. In the span of a month, I heard unsolicited three times that Delta Airlines was someone's preferred choice. As someone unfamiliar with the enthusiasm for Delta Airlines, I was certainly intrigued after hearing it mentioned a third time.

Fast forward a few months with this in the back of my mind, I heard an interview on The Barron’s Streetwise podcast with Delta’s CEO Ed Bastian, which brought those three little comments to the forefront of my mind. I was refreshing my Value Line catalog that week as well, which is a comprehensive investment research resource, so I snagged a DAL report.

Mid-Year Analysis

Around mid-year, the stock was facing pressure due to weaker earnings driven by high costs and lower travel. The company has also been clawing back to a more reasonable balance sheet after the significant losses and debt resulting from the pandemic. Nevertheless, I focus on valuation, future growth potential, and management’s ability to execute. I’ve heard nothing but stellar news about their quality, and management looks like they regained their footing, so that leaves me to solve for the valuation.

Entry and Exit Strategy

As you may have seen in previous write-ups, I use the following chart to identify the best entry and exit points for a stock. If you're new, feel free to check out my earlier posts on similar analyses: AMG Review and MAN Analysis.

I purchased Delta at an average price of $40.81 between July and August 2024. This represents around 6.8x my conservative FY24 EPS estimate. Wall Street calls for $6.10, while management expects $6-7. I was confident at that entry point given that the average lowest price to purchase DAL between 2019, 2022, and 2023 was 6x EPS, and historical highs traded at an average of 10x EPS. Prices tend to revert to the mean in the long run—in this case, less than four months. With today’s scenario in play, I find DAL at my price target for FY24. This makes it an ideal setup for a covered call, as it allows me to generate additional income while potentially capping the upside. I'll show the specifics of this strategy at the end.

DAL Best Entry/Exit Points, Value Line, Author’s Estimates

Performance Overview

Considering the challenges of a global pandemic in the last 10 years, this airline company managed to double its book value and increase both earnings and cash flow by 80%. Over the same time frame, shareholders saw a total return of 50%, which was short of the company’s actual performance—a notable indicator the stock may still have room to the upside.

Future Projections

Looking ahead, I’m using management's conservative end of their $6-7 2024 EPS estimate to project a 7% annualized EPS return from here. All things considered, over the long run (3-5 years), I can reasonably expect this stock to move upwards.

DAL Historical & Projected Performance, Value Line, Author’s Estimates

With assumptions in place, I can drill into an appropriate valuation for today and the year ahead. I find the historical average Price-to-Earnings ratio to be a solid guiding light.

Delta Airline’s historical average runs about 9x earnings. Applying that against my conservative FY25 estimate of $7.20, I get a $65 price target, which is roughly today’s quote.

The Trade - Covered Call DAL

A covered call is an options strategy where you sell a call option on a stock you already own, collecting premium income in exchange for potentially capping your upside if the stock price rises above the strike price. You might use this strategy to generate additional income or hedge some downside risk while holding a stock you believe will stay relatively flat in the short term.

As shown in my analysis, I think a fair valuation for DAL is about $65. In my Best Entry/Exit chart, I see that Delta may reasonably run up to $75 in 2025, which I would not like to miss out on. To ensure I capture the reasonable upside expected for 2025, as well as generate significant immediate income today, I structured a trade that will solve for all.

Call Structure - DAL

• Own 100 Shares

• Sell to Open 1 Call - Jan 16, 2026 - $75

• Premium: $7.10/Share - $710 per call

The Result

• Immediate Reinvestment: This premium can be immediately reinvested.

• Premium Collected + Downside Protection: 11% of the current position's value ($710 per 100 shares) collected today.

• Potential Appreciation: Position open to appreciate up to $75, or 16%, over the next 14 months.

• Maximum Gain: 27% over the next 14 months if the stock appreciates to the strike price.

• Annualized Return: 24% annualized return if the stock continues to appreciate.

• Quarterly Dividends: Continued collection of quarterly dividends.

Share Your Experience

Have similar situations? Please share below and consider selling covered calls to generate hefty cash premiums today—especially when cash is commanding high yields.

Christopher is long DAL shares, short long-dated calls.

The information provided in this blog is for educational and informational purposes only and does not constitute financial or investment advice. The strategies discussed here may not be suitable for everyone, and investing in the stock market carries risk. Please consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The author holds a position in Delta Airlines (DAL) and may change that position at any time.