Options Update: Traders Pile into Goodyear Tire & Rubber Call Options
Shares of Goodyear Tire & Rubber
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PowerRating) have surged more than 25% since the beginning of 2009, following the lead of many in the automotive parts sector. Investors are apparently betting that the Bush administration’s loan package to the major U.S. automakers will have a positive impact on the sector. For GT, the recent rally has taken the shares to within striking distance of technical support/resistance at the 8 level, prompting an outpouring of call volume from the speculative options crowd.
Specifically, the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.33 indicates that calls triple puts among near-term options. Furthermore, this ratio ranks below 93% of all those taken during the past year. Looking at our Intraday Volume Explosion List, it would seem that speculative options traders are pushing this bullish sentiment even further, as more than 12,000 calls have changed hands on the security so far. This wealth of activity has easily outpaced GT’s average daily call volume by more than 16 to 1.
The most active contract is the January 2009 7.50 call, which has seen more than 10,000 contracts trade on open interest of 3,079. Combine this activity with the fact that most of today’s volume has changed hands at the ask, and GT could be the target of buy-to-open call positions. As such, I will be running with a call-buying theme this afternoon.
The Anatomy of a Goodyear Tire & Rubber Call Position
Digging into this call activity, I noticed that a block of 2,250 contracts changed hands at 9:52 a.m. Eastern time at the ask price of $0.45. The total outlay for this position would be $101,250 — ($0.45 * 100)*2,250 = $101,250. As of about 1:00 p.m. Eastern, this trade was sitting in the money, with GT trading north of $8 per share – breakeven rests at $7.95 per share. The maximum loss on this position, should the shares reverse course before the options expire on Jan. 16, is limited to the initial investment of $101,250.
By entering this trade, the investor is indicating that he expects GT to rally sharply during the next several trading sessions. Obviously, the trade is already off to a stellar start, with the stock rising more than 6.6% so far today. That said, let’s see if the stock’s technical or sentiment backdrops provide any indications that GT could extend its strong price action.
Getting Technical
From a technical perspective, the stock has dropped more than 68% during the past 52 weeks, edging out the S&P 500 Index’s (SPX) loss of more than 32% for the same time frame. That said, GT has improved its fortunes in the past several weeks, rallying more than 92% since setting a multi-year low in late November 2008. Furthermore, the shares have pulled their 10-day and 20-day moving averages into a bullish cross – a technical formation that often precedes additional gains in the shares. Meanwhile, short-term technical support resides in the 7-7.50 area. This region had held GT lower from early November 2008, and today’s upside breakout could mark the beginning of a steady uptrend for the shares.
The Sentiment Drivers
The biggest hurdle for nearly any call position on GT is the excessive degree of bullish investor sentiment. As I mentioned above, options traders are placing sizeable bets that the shares will extend their recent technical strength. Wall Street analysts are firmly entrenched in their optimistic outlook for the company. According to Zacks.com, 5 of the 8 analysts following GT rate it a “buy” or better. This configuration should be particularly disconcerting for GT bulls, as the stock’s quick surge higher in the past several trading sessions may prompt analyst downgrades due to valuation concerns.
The Verdict?
It is clear that GT has momentum on its side. But, how long will that technical strength hold out? Sentiment toward the shares is heavily bullish, and it may take only a modest slip in the equity’s recent uptrend to shake loose the weak hands. As such, investors looking to take advantage of this new-found strength in GT shares may want to look at a position in the February or April series of options. This placement would give the trader a time-premium cushion that could offset any adverse market headwinds. Remember, the trend is your friend, but contrarian investors should be wary of any spikes in bullish sentiment toward GT.
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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.