American Axle & Manufacturing Holdings, Inc (AXL) is a designer and manufacturer of drivetrain systems for a variety of vehicles. The company’s stock is currently trading around $18.60 in a 52 week range of $9.27-$21.41. The stock has been outperforming the broader market adding over 66% to share prices year to date. The company will be reporting earnings tomorrow before the bell. We are currently seeing some bullish unusual option activity in AXL which is leading us to believe the stock will head higher on earnings. Early in today’s trading session a trader sold 1,000 AXL Nov 18 puts for $0.50 when stock was trading $18.38. This is an extremely bullish trade that indicates this trader strongly believes the stock will close above $18.00 on November expiration. Even though the stock is trading below the Ichimoku Cloud it is still inside of its bull channel that has been formed since the stock broke out late last year. We believe that these circumstances provide an opportunity for a covered call in AXL.
Trade: Buying 100 shares of AXL at $18.70 for every Nov 18 call sold for $1.10
Reward: $40 per 1 lot
Breakeven: $17.60
Should the stock close above $18.00 on November expiration this trade will net its maximum potential profit of $40 per 2 lot. This trade will also net some profit anywhere above $17.60. If the stock closes above $18 on expiration this trade will net an annualized return of 73.9%
