Options Trading News

December 6, 2011  Tue 1:47 AM CT

Shares of Navistar are trying to base out, and one investor is apparently using options to manage an entry point into the stock.

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.
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As I stated in last week's article, a break out or a break down needs to have a couple things happen before it is considered a confirmed break out or break down. The only problem is that in today's market where things move much more quicker than they did just a few years ago, two days could wind up being the majority of the expected movement, if not the whole movement.

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