Trader places bold bet on big rigs
06/21/17

Someone has some serious conviction that a major trucking stock won’t be slowing down this summer.

Most traders already know how dollars have been shifting away from the high-flying tech space this month. Many of have found new homes in older smoke-stack names.

Consider Cummins (NYSE: CMI), which motored to an all-time high over $163 in early May after earnings, revenue, and guidance blew past estimates.1 Market pros know better than to chase those kinds of moves, and waited for better entries closer to support. They got their opportunity two weeks later at $150. Not only was that a nice round number, but it was also near a recent low and the rising 50-day moving average. 

Options traders seemed to have that same level in mind yesterday because they sold 5,000 August 150 puts for $2 and $2.05 about an hour into the session. 

Puts are usually bearish because they fix the price where a security can be liquidated, but this time the opposite was true because the contracts were sold. That obliges the investor to buy CMI shares for $150 if they’re under that level on expiration. Here’re the risk and reward:

  • If they’re right and it stays above $150, the contracts will expire worthless and they’ll keep the $2 - $2.05 premium as profit. (That’s really more than $1 million because each contract controls 100 shares. $2 premium X 100 shares X 5,000 contracts = $1 million.)
  • Things stop being fun pretty quickly below that magic $150 level. Their entire profit disappears at $148, and they lose an incremental $500,000 every $1 the shares skid lower.
  • CMI fell 0.98 percent to $162.49, just one session after pushing its way back to record all-time highs.
Cummins (CMI), 6-month chart

Source: OptionsHouse by E*TRADE

Denizens of the diesel space raised their eyebrows at the timing of the put sale because the contracts are set to expire after the next earnings report. This guy (or gal) is definitely a believer in the name because they’re risking a ton of capital (max loss = $75 million) on CMI not crashing down through $150. It looks like they have confidence in that coming set of numbers.

Sentiment has recently supported their moves, especially in the 18-wheeling niche. Paccar (Nasdaq: PCAR), for instance, has earned upgrades this month from Goldman Sachs and UBS. Baird also raised its opinion of Navistar (NYSE: NAV). Other related names like XPO Logistics (NYSE: XPO) and Swift Transportation (NASDAQ: SWFT) have also been on the move. 

Bottom line: Truck stocks have recently moved into the fast lane, and yesterday someone really stuck their neck out for a key name in the space.

 

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1. Reuters: Cummins raises 2017 forecasts on strong China construction demand. 5/2/17. Marketwatch: Cummins shares jump 6% premarket after earnings beat. 5/2/17.