Navistar International: Options Still Reflect Elevated Near-Term Risk

Navistar International Corporation  (NAV) is a holding company, whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation (NFC). The Company is a manufacturer of International brand commercial and military trucks, IC Bus (IC) brand buses, MaxxForce brand diesel engines, Workhorse Custom Chassis (WCC) brand chassis for motor homes and step vans, and Monaco RV (Monaco) recreational vehicles (RV), as well as a provider of service parts for all makes of trucks and trailers.

There’s been a lot going on with NAV of late. I posted an article on 6-12-2012 entitled, “Navistar Int'l (NAV) - Vol Hits 2-Year High; Options Reflect "Extraordinary" Near-term Risk; Research Firm Claims Stock Worth 200%-300% More in Takeover.” I summarized the goings-on in that post and will do a very brief re-cap below. But, you can read the full article Here.

Quick Summary

6-7-2012: Stock dropped from $28.15 to $24.11 off of an earnings report. But, the stock actually recovered nicely intraday after it reached its low of $20.11.

6-11-2012: The stock rallied all the way back above that pre-earnings price, closing at $28.74.

6-12-2012: But, note the last part of a Motley Fool article, "Navistar is also waiting for the Environmental Protection Agency to finish its review process of nitrogen oxide emissions in its newer heavy-duty truck engines with no timetable on when that will be completed." Well, it turns out the timetable was today. The stock is off more than 10% again, after rallying all the way back from the earnings report.

Vol actually increased off of the earnings report. That vol rise has continued and is now highly irregular for NAV given its recent (two year) past. On 6-6-12, NAV IV30™ was trading at 57.36%. Today it's up to 83.78%, or a 46% increase in just six calendar days. To give the current level some perspective, the 52 wk range in IV30™ for NAV is [29.97%, 75.53%], so it's well into a new annual high today. Looking back even further, the 104 wk range (2 year) for IV30™ is [27.51%, 75.53%]. In English, the implied is now trading more than 10% higher than the two-year high. That's a lot of vol...

Let’s move to some analysis as of today (6-26-2012) and start with the Charts Tab (six months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side, we can see how the underlying has been on a rather straight line decline since recovering ever so quickly from the various news items (above). Using a little perspective, we can see how the stock has fallen ~50% since early Feb in essentially a straight line down.

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On the vol side, we can see how elevated the implied got in mid-June, and though it has come down from those highs, it’s still substantially elevated relative to the long-term historical realized vol as well its own six-month (and two-year) history. The option market still reflects elevated risk for NAV relative to the last two-years.

Let’s turn to the Skew Tab to examine the monthly term structures.

Here’s where it gets interesting. The skew illustrates a monotonic increase from the back to the front, while maintaining a similar shape across the three expiries. The next earnings release for NAV should be in Sep, so outside of the front two expiries but inside Oct. In English, the near-term risk reflected by the options is greater than that reflected in the next earnings release. I do also note the upside skew (OTM calls) in Jul – the potential (risk) of a large upside move is priced (in terms of vol) similar to a large downside move. That shape is not consistent with the back month yielding a large calendar vol diff between the first expiry and the back two to the upside.

Finally, let’s turn to the Options Tab.

I wrote about this one for TheStreet (OptionsProfits), so no specific trade analysis here. Across the top we can see the monthly vols are 81.25%, 74.42% and 69.59%, for Jul, Aug and Oct, respectively. Looking more closely at specific OTM strikes, we can see much larger vol diffs than the 7 points shown between Jul and Aug. Specifically, the Jul/Aug 20 vol diff is more than 15 vol points, while the Jul / Aug 30 vol diff is ~10 vol points.

Disclosure: This is trade analysis, not a recommendation.

Written By: Ophir Gottlieb