Bears bet Navistar is heading south


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Navistar has been rallying, but a large trade yesterday was bearish.

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.

NAV 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)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

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