Arb Focus: Dana Corp. Sees Intense Options Activity

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By Andrew Morse
Staff Reporter

Pop quiz, hotshot.

You're a trader and the stock you're watching is up 18% over the last six weeks. The company has reported better-than-expected earnings. It's picked up a couple of big contracts that should keep the cash coming in for months. At least until July earnings.

What do you do?

If the company is

Dana Corp.

(DCN)

, a Toledo-based maker of auto parts, you sell options -- a lot of options -- against it.

No one is sure why, but options activity in the surging company has picked up in the past few days. In the last six weeks, Dana has risen from 30 3/4 to 36 3/8.

On May 29 and 30, 1,007 June 35 calls got written even as the stock rose, according to the

Chicago Board Options Exchange

. That's more than the average volume of all Dana options in April, when just two a day were traded.

The calls, each of which gives the buyer the right to purchase 100 Dana shares at 35, were sold for a mere 1 1/8. Because the stock was trading at 36 when the calls were written, the seller made a slim 1/8 -- that's 12 1/2 cents -- per option. And if the stock pops up above 36 1/8, which it has, the writer starts losing money.

Makes you wonder why he even bothered.

Or, say some traders, what he knew.

"He

the seller wouldn't do that unless he thought Dana was going to dip," said one trader who is also shorting the auto parts maker. "At least temporarily."

Certainly the fundamentals, as well as the analysts, argue against being bearish on the company, one of the components of the

Dow Jones Auto Parts Group

. While the Big Three did announce lower year-on-year sales in May -- all said sales posted double-digit drops --

Ford

(F) - Get Report

announced it would boost production in the second quarter.

And Dana recently announced a contract to supply

Toyota Motor Corp.

(

(TOYOY)

TOYOY ADR) with engine parts for Camrys and Avalons built at the Japanese car giant's Georgetown, Ky., plant. It also produces frames for the Toyota's Tacoma model. Keep on truckin'.

The sudden rush in options trading puzzles analysts, who say the string of good news augurs well for the company.

"There's plenty of room for upside," says Gregory Kagay, the automotive analyst at

McDonald & Co.

"I see it as a gainer." McDonald has no investment banking relationship with Dana.