Trade Idea: Short-Term Options on Harley Davidson (HOG), Amid Sell-Off

12/06/2018 4:06 pm EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Motorcycle maker Harley-Davidson is one of many stocks getting rattled this week by uncertainty over U.S.-China trade relations -- which currently seem as rocky as ever, despite initial optimism after talks between Donald Trump and Xi Jinping, writes Elizabeth Harrow.

Milwaukee-based Harley-Davidson (HOG) gapped lower out of the gate Thursday morning, steepening a two-day sell-off alongside auto stocks (and the broader U.S. equities market).

From a broader perspective, HOG is down more than 21% in 2018, and spent the bulk of this calendar year bumping up against resistance at the $46 level -- a former layer of support during the third and fourth quarters of 2017. More recently, the motorcycle stock rallied up to within striking distance of a moving average that has provided reliable sell signals in the past, suggesting another fresh leg lower is on the horizon.

Specifically, Schaeffer's Senior Quantitative Analyst Rocky White notes that HOG is trading within one standard deviation of its 52-week moving average, after having spent 45 consecutive weeks below this trendline. Following 15 comparable tests of resistance at this level over the past 15 years, HOG's average return four weeks later is a loss of 3.60%, with only 20% of those returns positive.

And looking out three months after a signal, the stock's average return is a drop of 10.10%, with 21% of returns positive.

Downgrades could pressure Harley's stock further south. Despite the long-term underperformance, only one brokerage firm out of 16 calls HOG a Sell, with the remaining analysts split between Buy and Hold ratings. Any negative notes from this group could spark additional selling pressure.

Meanwhile, following a 5.7% drop in short interest during the two most recent reporting periods, short interest on HOG is now back near its 2016-2018 lows.

If short sellers smell blood in the water for struggling HOG shares, a ramp in short-selling activity could provide a stiff headwind for the stock in the weeks ahead.

Short-term options on HOG remain fairly reasonably priced, despite the ramp this week in the CBOE Volatility Index (VIX). The stock’s 30-day at-the-money implied volatility (IV) of 30.5%, per Trade-Alert, is near the mid-point of its annual range between 21.4% and 50%. In other words, option premiums are moderately priced, which means put buyers can still obtain favorable leverage on a downside move in the underlying.

View Schaeffer’s Investment Research for stock and options ideas, options education, and market commentary here

Todd Salamone of Schaeffer’s Investment Research: How to trade options like the pros in a webinar here.
Recorded: TradersExpo Las Vegas, Nov. 13, 2018.
Duration: 49:23.




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