How To Play Navistar's Death

Navistar International Corporation (NYSE: NAV) has become one controversial stock. Some pundits are even saying that ultimately this company could be at risk of bankruptcy. Others believe that there is huge intrinsic value here, and activist Carl Icahn is involved in this one and he and one other activist now have about 25% of the company.

CNBC’s Herb Greenberg has been vocal on the risks here and he has cited independent research from Gimme Credit which has said that bankruptcy is a possibility even with Icahn and activists involved. Jim Cramer has also been vocal against Navistar and Robert W. Baird downgraded the stock to Neutral earlier this month.

There is one key risk in being a naked short here. Icahn and Mark Rachesky of MHS Fund Management could just take this company private. With almost $1.5 billion in cash and short-term liquidity, this is one of those situations that warning of bankruptcy almost feels ludicrous on the surface.

The devil is in the details. CNBC noted that the Gimme Credit report “believes they are betting that Navistar eventually gets the EPA’s blessing for the controversial so-called Exhaust Gas Recirculation, or “EGR” technology that Navistar has, in effect, bet the ranch on. The rest of the industry uses more conventional Selective Catalytic Reduction, or SCR, technology.” At risk is $3 billion and here is more from CNBC on the matter.

So, how can investors play this on the cheap? A naked short sale just seems too risky here because with shares at $29.40 after a 2.8% gain on Thursday it has a 52-week trading range of $20.21 to $58.50. The most recent short interest was listed as only 3,550,900 shares. Here are some key option trading strategies we are seeing for how to play this one on the downside if the research ends up coming out on the worst case scenario:

• One popular option strategy around this possibility today is the October-2012 $25.00 Put Option contract which will expire on Friday, October 19, 2012. While this contract had only an open interest of 588 contracts, the volume today was 1,185 contracts. That trade is $2.40 per contract.
• Another option seeing downside volume is the August-2012 $29.00 Put Option at about $2.80 per contract. The open interest was only 58 contracts before today against today’s volume of 308 contracts.
• The near-month July 2012 contracts are seeing activity as well in the $29.00 Put Options. We have already seen 1,015 contracts trade against an open interest of some 97 contracts before today.

Navistar is turning into one major battleground stock.  This is not a situation where bankruptcy is assured.  It is also one where some investors are taking the stance that bankruptcy is more and more of a possibility.

JON C. OGG