Navistar has been rallying, but a large trade yesterday was
The transaction involved about 6,000 contracts each in the March 50
puts, the March 60 puts, and the March 70 calls. There was barely
any open interest in any strike when the session began, and the
trade accounted for almost all the options volume in the session.
Analysis by our Depth Charge monitoring program suggests that the
60s were purchased for about $1.80, while the 50 puts were sold for
$0.25 and the 70 calls were sold for $1.30. That totals up to a net
cost of $0.25 per put contract owned.
NAV rose 2.92 percent to $64.93 and is up 33 percent in the last
three months. The truck maker gapped higher in the previous session
on a bullish forecast and traded above $66 for the first time since
July 2008. It failed to hold that level, resulting in a so-called
shooting star pattern that some chart watchers may interpret as a
prelude to a reversal lower.
Yesterday's option trade is designed to exploit such a drop and
will double the investor's money for every $0.25 that NAV trades
below $59.75. The profit will max out at 3,900 percent if the
shares decline to $50 or lower.
It will also incur losses if the stock rallies above $70. However,
the position may have been the work of an investor who owns the
stock and is using the options as a hedge. In that case, the trader
would be forced to sell shares at $70 if it goes above that level.
The $70 area is also important because it's roughly where NAV
started trading after getting relisted in June 2008 in the wake of
delayed financial statements. It proceeded to lose more than
three-quarters of its value when the market crashed later that year
and has been rallying back since.
The three-part trade pushed total option volume in the stock to 19
times greater than average, according to the Depth Charge.
(Chart courtesy of tradeMONSTER)