Traders sees motorcycle icon turning a corner: Options report

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This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

America’s most famous motorcycle stock has been in a funk, but now someone seems to think Harley Davidson (HOG) is turning a corner.

Options volume spiked in the stock yesterday as traders crafted a complex upside strategy to leverage a rebound in HOG over the next two months:

  • A block of 6,000 June 42.50 calls was bought for $1.29.
  • A block of 6,000 June 45 calls was sold for $0.43.
  • A block of 6,000 June 37.50 puts was sold for $0.44.

The calls form a bullish vertical spread. Owning the lower-strike contracts locks in a $42.50 entry price where they can purchase HOG shares, while selling the 45s generates income and commits them to selling if the higher level is reached. He or she also sold naked short puts to generate extra income — a high-risk position if HOG breaks below $37.50. See our Knowledge Center for more.

Selling two out-of-the-money options lowered the cost of the trade to $0.42. They will collect $2.50, a potential profit of 495 percent, should the stock close over $45 on expiration.

HOG rose 0.76 percent to $42.33 yesterday. It’s lost more than a quarter of its value since the start of last year on weakening sales. But the last quarterly report on April 24, with profit and revenue beating estimates, showed growth of new riders overseas replacing older customers in the U.S.

Wednesday’s option trade was also interesting because the investor sold puts near a long-term low from January 2016. That could make them expect the shares to hold their ground in the near term.

Total option volume in the company was triple the daily average, with the complex three-way trade accounting for the lion’s share of the activity.

Harley Davidson (HOG) chart
Harley Davidson (HOG) chart
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.