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TheStreet Open House

Options Turn Bullish on Vehicle Sector

By David Russell, reporter at OptionMonster

NEW YORK -- Worries about the global economy have hammered the vehicle sector, but options are turning bullish this week.

Companies including Navistar (NAV), Meritor (MTOR), Ford (F) and American Axle (AXL) have all seen unusual call volume as investors look for their stocks to rebound from multi-year lows. Other groups with similar activity recently, such as energy and gold miners, have rallied after trades occurred in their industries.

For example, Meritor came into Tuesday's session after with a 67% loss over the preceding year, and was near its lowest point since mid-2009. About halfway through the afternoon, buyers started snapping up the September 5 calls for 30 cents and 40 cents. Some 4,600 had traded by the end of the session, versus previous open interest of just seven contracts.

Those calls lock in the price investors must pay to buy shares in the company, which makes drive trains and brakes for trucks and trailers. They can generate significant leverage in the event of a rally but will expire worthless if the stock fails to move. Traders like calls because they're a cheap way to play short-term moves while limiting the amount of capital at risk.

The company, which saw its shares rise 6.36% to $4.68 Tuesday, reports third-quarter results Wednesday morning. The fact that traders chose calls in September instead of August reflects a belief that the stock may not rally immediately after the release but will push higher over the intermediate term.

Overall option volume in the name was 20 times greater than average, with calls outnumbering puts by 18 to 1.

Russell has no positions in the stocks mentioned in this article

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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