Large Harley-Davidson Option Trader Bets On 10% More Downside

Shares of Harley-Davidson Inc HOG fell 2.7% on Friday after China said it would be imposing a 25% tariff on imported U.S. automobiles starting in December.

Harley shares are now down 27.4% in the past year as the trade war has weighed on the company’s international sales, and at least one large option trader sees much more downside ahead over the next five months.

The Trade

On Friday, Benzinga Pro subscribers received an option alerts related to an unusually large Harley-Davidson option trade.

At 10:18 a.m. ET, a trader bought 2,000 Harley-Davidson put options with a $30 strike price expiring on Jan. 17, 2020. The contracts were purchased at the ask price of $2.021 and represented a $404,200 bearish bet that Harley-Davidson shares have at least another 10% downside ahead by mid-January.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively small size of the Harley-Davidson option trade by institutional standards, it is unlikely to be an institutional hedge.

No End In Sight To Trade War?

Harley-Davidson has been at the epicenter of trade war headlines after the company said tariffs are costing it about $100 million per year earlier this year. Last year, when Harley said it was planning to move production from the U.S. to Thailand to avoid trade war tariffs, U.S. President Donald Trump encouraged customers to boycott the motorcycle maker.

Harley also announced another strategy to avoid the tariffs in June, partnering with China’s Qianjiang Motorcycle Company to produce small motorcycles in China that will hit the market in 2020. Harley’s China sales were up 27% in 2018, and investors expect China to play a pivotal role in Harley’s long-term goal of having 50% of total sales come from international markets by 2027.

For now, Friday’s Harley option trader clearly seems to see the situation going from bad to worse for Harley over the next five months. If a trade deal is not reached by Dec. 15, U.S.-made Harley motorcycles will be subject to 25% tariffs in China and 31% tariffs in Europe.

The stock traded around $31.30 per share at time of publication.

Related Links:

China To Raise Import Tariffs On $75B Additional US Goods

How To Read And Trade An Options Alert