Mohawk bulls waiting for breakout

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Mohawk Industries reports earnings next week, but the bulls are willing to wait for their move.

optionMONSTER's Heat Seeker monitoring program detected the purchase of about 2,000 November 125 calls for $5.22 and the sale of a similar number of November 95 puts for $1.72. Volume was more than 8 times open interest at both strikes, indicating that new positions were initiated.

Owning calls locks in the price where shares can be purchased, and selling puts creates an obligation to buy them in the event of a pullback while generating income now. Combining the two strategies is bullish because it reflects a belief the stock will both go up ( long calls ) and not go down ( short puts ). Both halves of the trade stand to lose money to the downside, but if it goes up the leverage could be significant. (See our Education section)

MHK rose 1.26 percent to $117.25 yesterday. The flooring manufacturer almost tripled between October 2011 and earlier this year but has been moving sideways ever since. Earnings have been strong, and the next set of numbers will be released after the closing bell next Thursday, Aug. 1.

Yesterday's strategy is interesting because it prevents the investor from missing a breakout above $125--a level the stock has never seen. It also programs a buy order at the same $95 area where MHK consolidated early this year before muscling into triple digits.

Total option volume was 29 times greater than average 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: MHK

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