Complex strategy follows TRW pullback

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TRW Automotive has pulled back after a blistering run, and now one investor is using a complex strategy in hope of more upside.

optionMONSTER's Heat Seeker tracking system detected the purchase of 7,000 July 50 calls for $2.55 and the sale of 7,000 July 35 puts for $1.05. A block of 14,000 July 60 calls were also sold for $0.40. The strategy combines elements of a ratio spread and bullish combination to boost leverage. (See our Education section)

The trade resulted in a cost of $0.70 and has the potential to earn a maximum profit of 1,329 percent if TRW closes at $60 on expiration. Gains will erode above that level and turn to losses over $65. That's roughly the same price where the stock peaked throughout the course of 2011, so the investor may expect resistance around that level.

TRW fell 0.28 percent to $45.69 yesterday but is up more than 40 percent this year. The auto-parts maker has beaten estimates the last three times it reported earnings amid increased vehicle production.

The stock has been falling for the last two weeks, which could be leading some traders to believe that it is now attractive on the pullback. Yesterday's complicated trade also obligates the investor to buy TRW shares for $35 if they fall to that level. The trader might be willing to do that, given that he or she is already bullish on the stock.

Overall option volume was 18 times greater than average in TRW in the session, according to the Heat Seeker.



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

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


This article appears in: Investing , Options

Referenced Stocks: TRW

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