Calls on This Rental Car Company Are Worth a Look

03/03/2010 12:01 am EST


Adam Warner

Author, Options Volatility Trading

MKM Partners recently stated the following about Avis Budget Group (CAR):

“We expect positive data points in 2010 on travel volumes and pricing to provide soft catalysts for the shares of CAR and HTZ, but believe earnings will be the key driver for the stocks to move higher. Given the recent decline in the stocks and price targets that are 71% and 59% above current levels for CAR and HTZ, respectively, we believe long positions    should be supplemented with upside exposure via call options.

Six-month, at-the-money IV in both stocks has declined sharply, and although high on an absolute basis (57% for CAR and 50% for HTZ), looks to have plateaued at current levels, suggesting to us that options are reasonably priced. For exposure through the next two earnings reports, we would couple long stock positions with owning August 10 strike calls in CAR for $2.20 and September 10 strike calls in HTZ for $1.35. The CAR calls break even at 12.20, 11% above current levels, where the stock was on February 18. Similarly, the HTZ calls break even at 11.35, or 17% above current levels.”

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Now on a chart basis, CAR here looks pretty bad. Lower highs, lower lows, yada yada. Plus, the 20-day and/or 50-day look like some resistance up above.

But MKM Partners is making a fundamental case here.

And the vehicle (no pun intended) looks good as the calls are indeed on the cheaper side for CAR.

So if you're on board with the idea, calls are a good way to go to play this rental car company.

By Adam Warner of

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