How investor is using puts in Navistar
David Russell | firstname.lastname@example.org
optionMONSTER's tracking systems detected the sale of 1,000 January 40 puts for about $2.73 and the purchase of an equal number of January 35 puts for $1.16. Volume was more than twice the open interest in both strikes.
The trader is obligated to buy shares in the truck maker for $40 if they remain below that level through expiration. The position paid an upfront credit of $1.57, which would lower the stock entry price to $38.43.
The trade is an example of a strategy outlined in Chris McKhann's last weekly column: Selling puts can be an effective way to enter a stock because the initial credit cushions against short-term fluctuations. (See our Education section)
If NAV rallies and closes above $40, they won't have to buy shares, but they will keep the $1.57. He or she also bought the 35 puts as protection in case the stock collapses to new lows.
NAV fell 2.76 percent to close at $39.12 yesterday and has traded between about $32 and $44 since the summer. News has been mixed on the name, which has reported weak earnings, but activist investor Carl Icahn has been building a position in the company.
Overall option volume was more than triple the daily average in yesterday's session.