Unusual Options Activity Signals Bullish Shift to Travel Stocks

Key Points

• With a sudden shift in sentiment for travel stocks, investors now have a window of opportunity to squeeze through two stocks. 
• Today's list makes sense as a bullish bet on a currency exchange rate, smartly hedged by traders.
• Double-digit upside stands in front of investors today, backed by high conviction.

There are plenty of ways for retail investors to gauge how the market feels about a certain stock or group of stocks, and that is typically done through measuring buying or selling activity right along with price action relative to a benchmark like the S&P 500 index. However, there’s a much more significant way to align portfolios with what the so-called “smart money” might be thinking in the background.

This is where tracking unusual options activity comes in handy for investors. In the world of options, the stakes are driven much higher by two main factors. First, options inherently increase the leverage taken in any trade, so position swings are much more aggressive (and thus require more conviction). The second aspect is timing, since options have an expiration date that threatens the total loss of a position if mistimed.

Today, call option buyers—betting on higher prices—appeared to target two travel-related stocks. In the technology-driven online travel space, Trip.com Group NASDAQ: TCOM saw heightened activity, while in traditional transportation, attention shifted to Southwest Airlines Co. NYSE: LUV.

Why The Sudden Shift to Travel?

Most retail investors fail to follow this, but the global macro landscape drives most investment decisions in one way or another. Today, the currency markets have sent a major signal for investors to take advantage of, specifically how the Dollar’s exchange rate to the Euro has shifted to a 52-week low.

A weakening Dollar against the Euro creates major implications for travel, especially as Trip.com largely operates in Europe. Affluent American consumers might still choose to have their European Summer vacations coming up, but European travelers might feel more encouraged after seeing lower prices relative to a few months ago.

So, betting on Trip.com makes sense from the European standpoint, but what about Southwest?

A weaker dollar will make the average traveler think twice about going overseas and look to domestic travel destinations instead, which is where this regional airline comes into play for a high-conviction options trade.

Wall Street Likes Trip.com and Its Setup

Now that Trip.com shares have fallen to only 71% of their 52-week highs, it makes sense for some traders to consider this stock a favorable risk-to-reward ratio moving forward. Having already priced in most of the downside, investors are left with most of the upside potential these traders managed to spot in the company.

That being said, these are not the only ones who feel this way about Trip.com today. Wall Street analysts have landed on a consensus price target of up to $77.1 per share as of April 2025, with a high coming out of Benchmark analysts for a Buy rating coupled with a $80 per share valuation.

With the consensus, investors can expect an implied rally of up to 46% from where the stock trades today, reiterating the view that the potential downside is very limited compared to how much of a rally can be had in this current thesis.

Other ways of justifying a bullish view include the wave of institutional buying over the past quarter, where up to $2.3 billion of institutional capital found its way into Trip.com stock. This gives investors another bullish pillar to lean on when developing their buying thesis.

Southwest: The Premium Affordable Airline

The premium doesn’t necessarily mean the pricing (nor the services offered) by the airline and its flights, but it does tie up to something much better. Southwest Airlines stock trades at a price-to-earnings (P/E) ratio of up to 34.3x, a steep premium to the transportation sector’s average of 13x P/E.

Some value investors might argue that this makes Southwest a risky stock to own. However, seasoned traders would counter that the market often willingly overpays for stocks it expects to outperform both its peer group and the broader market, and usually for good reason.

In this case, the outperformance belief drove up to $863,677 worth of call option buying into the stock for April 2025, which is not common in a stock that hasn’t been that popular lately. Since it also offers a discount to its highs, at 68% of 52-week high levels, the setup is similar to Trip.com’s in the sense that it significantly favors the buyers.

This premium is solidified by Barclays analysts, who decided to place a $32 per share valuation on Southwest Airlines as of April 2025, offering investors a net upside potential of 30% from today’s low prices. Understanding these factors had another effect on investors' consideration of moving forward, this time coming from the bearish traders.

Over the past month, Southwest Airlines reported that up to 6.1% of its short interest declined, a clear sign of bearish capitulation as sellers face the mounting pressures of all these bullish indications.