How to Trade Short-Term Moves in Stocks Using Options

12/09/2010 12:01 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Options were unusually active on Navistar International Corporation (NAV) on Tuesday (December 7), with overall volume rising to roughly four times the norm. By mid-morning, a total of 5,711 calls and 3,711 puts had changed hands on the trucking specialist. Checking out a few of the day's major block trades, it looks like one speculator is betting on short-term gains for NAV.

Specifically, the trader purchased a block of 1,500 January 2011 60-strike calls, and simultaneously sold a matching block of 1,500 January 2011 75-strike calls. In other words, this seems to be a long call spread on the stock. With NAV trading just shy of $58 at last check, this spread strategist is looking for the shares to climb as high as $75 prior to January expiration. This would reap the maximum potential profit on the purchased calls, while the sold calls could be left to expire worthless.


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However, NAV is no stranger to optimistic speculation. During the past ten days, traders on the International Securities Exchange (ISE) have bought to open 12.64 calls for every put on the equity. This ratio ranks higher than 85% of other such readings taken during the previous year, pointing to an elevated preference for bullish bets.

The stock's recent technical performance certainly supports this rising tide of optimism. NAV has galloped to a gain of 50% in 2010, and peaked earlier at a new annual high of $59.25. The shares are now trading well north of support at their ten- and 32-day moving averages, which have underlined NAV's ascent since late September.

By Elizabeth Harrow, contributor, Schaeffer’s Trading Floor Blog

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