CNBC Stock Blog

Is the Auto Sector Heating Up?

David Russell|Writer, OptionMonster
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Worries about the global economy have hammered the vehicle sector, but options are turning bullish this week.

Companies including Navistar International, Meritor, Ford Motor, and American Axle and Manufacturing Holdings have all seen unusual call volume as investors look for their stocks to rebound from multiyear lows. Other groups with similar activity recently, such as energy and gold miners, have rallied after trades occurred in their industries.

Auto Industry Stocks

Meritor, for instance, came into yesterday’s session after with a 67 percent 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 $0.30 and $0.40. Some 4,600 had traded by the end of the session, versus previous open interest of just 7 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. Calls 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.

Meritor, which saw its shares rise 6.36 percent to $4.68 yesterday, reports third-quarter results this 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.

—By CNBC Contributor David Russell

Additional Views: Hedge Fund Pro Sees Value in Automakers


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David Russell is a reporter and writer for OptionMonster. Russell has no positions in the stocks mentioned in this article.