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Navistar Options Active After Courtroom Hit

NAV has had a crazy week on and off the charts

by 6/12/2012 12:05:44 PM
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Options traders have set their sights on Navistar International Corp (NAV - 26.37), which has bucked the broad-market trend higher in the wake of an unfavorable courtroom ruling. In a nutshell, a federal appeals court vacated an Environmental Protection Agency (EPA) rule that would've allowed Navistar to pay fines in order to continue selling engines that fail to meet pollution standards.

So far today, NAV has seen roughly 13,000 puts and 4,800 calls cross the tape, compared to its average intraday volume of about 1,200 puts and 780 calls. Digging deeper, it appears speculators are buying to open the stock's June 25 put, which has seen about 7,000 contracts change hands -- half of which traded at the ask price. Plus, implied volatility has spiked 27.6 percentage points, reflecting escalating demand for the soon-to-expire options. By purchasing the puts to open, the buyers are betting on NAV to breach the $25 level by the end of the week.

On the flip side, the stock's out-of-the-money June 30 call has seen nearly 2,500 contracts traded on open interest of fewer than 1,400, pointing to an influx of new positions. However, the majority of the calls have traded at the bid price, pointing to seller-driven volume. By writing the calls to open, the sellers are expecting NAV to remain south of $30 through the end of the week. In this best-case scenario, the calls will expire worthless, and the traders can retain the entire premium received at initiation, which represents the maximum potential reward on the play.

Even before today, though, bearish bets were becoming par for the course for NAV. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day put/call volume ratio of 1.09 -- in the 77th percentile of its annual range. In other words, options traders have bought to open NAV puts over calls at a faster-than-usual clip during the past couple of weeks.

Plus, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.49 indicates that puts comfortably outnumber calls among options slated to expire within three months. Furthermore, this ratio stands just seven percentage points from a 12-month peak, suggesting near-term options players have rarely been more put-heavy toward NAV during the past year.

It's been a crazy week for Navistar, both on and off the charts. The shares fell to a three-year low on June 7, thanks to an earnings miss. However, activist investor Carl Icahn used the stock's sell-off as an opportunity to bolster his stake to 12% from 10%, which helped NAV recover on June 8. Meanwhile, reports that Volkswagen is considering a stake in the firm boosted the equity yesterday, helping NAV notch its second straight finish atop its 10-day and 20-day moving averages -- a feat not accomplished since mid-March. Today, however, the shares are right back in the red, surrendering 8.3% to linger in the $26.40 region.

Daily Chart of NAV since March 2012 With 10-Day and 20-Day Moving Averages

Nevertheless, while the options pits have been upping the bearish ante, not everyone on Wall Street has capitulated to the skeptics' camp. Currently, six out of 15 analysts maintain "strong buy" endorsements on the equity. Plus, the consensus 12-month price target on the equity stands at $35.86, implying expected upside of 42.4% to NAV's intraday nadir of $25.19 today. Should the brokerage bunch abandon ship, a flood of downgrades and/or price-target cuts could exacerbate the stock's technical troubles of late.

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