Play This Auto Stock Sell Signal with Put Options

DAN tends to drop after testing resistance at this key moving average

Aug 6, 2018 at 1:45 PM
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There's been plenty of buzz lately about Tesla short sellers -- but elsewhere in the auto sector, drivetrain specialist Dana Inc (NYSE:DAN) is the stock we're watching for an upcoming downside move. According to data analyzed by Schaeffer's Senior Quantitative Analyst Rocky White, DAN just bumped into a historically significant moving average that tends to send the stock reeling.

Specifically, DAN is trading within one standard deviation of its descending 40-day moving average, after having spent nearly all of the last six months pinned below this trendline. Looking back over the last three years, says White, this is the sixth time Dana stock has risen to test its 40-day moving average after a prolonged stretch beneath it.

Following the previous such signals, DAN was lower five days later 100% of the time, with the average return for that time frame weighing in at a loss of 6.3%. And one month after a signal, the stock was negative 80% of the time, with a loss of 6.7% for the average return.

dan stock sell signal 0806

Checking out the stock's sentiment backdrop, there's reason to believe that DAN's latest advance on its 40-day moving average might yield similarly bearish results in the short term. Short interest on the equity is hovering near nine-year lows, and currently accounts for only 1.6% of DAN's float. However, a 3.8% rise in short interest during the most recent reporting period indicates shorts are moving back in -- and a continued increase in shorting activity could create steady selling pressure.

Meanwhile, with Dana's second-quarter earnings report behind us, short-term implied volatility (IV) levels on the stock's options have come back down to earth. Schaeffer's Volatility Index (SVI) of 28% arrives in the 21st annual percentile, as front-month options on DAN have priced in lower volatility expectations just 21% of the time in the past year. In other words, prospective put buyers can pick up short-term DAN options for relatively affordable prices, from a volatility perspective.

In fact, the options market seems to be pricing DAN puts to move. Trade-Alert notes the 30-day implied volatility (IV) skew of 8.2% ranks in the 20th annual percentile, which means the stock's put options are pricing in an unusually narrow volatility premium relative to their call counterparts. With put premiums relatively low, traders can benefit from enhanced leverage on bearish DAN option plays right now.

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