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April 4, 2011  Mon 12:05 AM CT

MTOR: SEE CHART GET CHAIN FIND STRATEGIES
Meritor fell hard after cutting its profit forecast last week, and one trader thinks the maker of truck parts will drift sideways into the summer.

optionMONSTER's tracking systems detected the sale of about 10,000 August 17 puts for $2 and an equal number of August 18 calls for $1.50. Volume was more than 110 times open interest in both strikes.

The trade, known as a short strangle, earned a credit of $3.50, which the investor will keep if MTOR closes between $17 and $18 on expiration. Profit will erode outside that range and turn to losses below $13.50 or above $21.50.

The stock ended Friday's session down 2.65 percent to $16.52. It plunged 15 percent plunge the previous session after galloping steel prices caused management to cut second-quarter earnings guidance.

The company recently changed its name from ArvinMeritor and its stock symbol from ARM after divesting its light-vehicle business and saying it would focus on commercial-truck parts such as axles and suspension systems. MTOR is also a major supplier of drivetrains for military vehicles.

Some chart watchers may expect the shares to hold their ground or rebound slightly because they seem to be finding support around the same $16.50 level where they peaked between last May and August. That could bolster the case for a range-bound strategy such as a short strangle. (See our Education section)

The trade pushed total options volume in the name to more than 20 times the average in Friday'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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