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Options Trading News

December 6, 2011  Tue 1:47 AM CT

NAV: SEE CHART GET CHAIN FIND STRATEGIES
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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Education & Strategy

Sweet Spot Exceptions

As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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