‘Bald’ Bet on Goodyear Tire Raises Eyebrows in the Options Market

• Traders piled into $10 call options for Goodyear Tire with unusual gusto in the midweek session.
• Usually, tire companies don’t make for great investments against recessionary headwinds.
• However, GT stock is also intriguing because of inflationary pressures.

Although tires represent one of the most important components in vehicular transportation, on the consumer side, they tend to be overlooked, often taken for granted until their compromised structure can no longer be ignored. This dynamic may help to explain why Goodyear Tire (GT) has been a vexing investment.

On a year-to-date basis through the July 6 session, GT stock is down nearly 52%. Over the trailing five-year period, shares have slipped over 70%. Since its first public closing price back in 1982, GT is down a little over 15%. Throughout the decades, its technical chart resembles a seismograph and it’s easy to see why.

People buy tires, drive them for a few years and then replace them: rinse, recycle, repeat. However, this equation changes dramatically during recessionary cycles – and typically not in a good way.

Back in 1992, The Washington Post detailed a debate about the economic interpretation of the higher frequency of people driving on bald tires. One school of thought suggested that compromised tires reflected pent-up demand. The realists countered that drivers transporting themselves on old (and therefore dangerous) tires reflect an inability to pay.

Logically, with economic conditions worsening as inflation takes a bite out of households’ real earnings, an investment into GT stock seems rather risky. Yet Goodyear was the recipient of unusual options activity recently.

Betting Big on GT Stock

When the ink dried on the July 6 session, Goodyear raised some eyebrows when it lit up the radar for unusual options activity. Traders piled into the $10 call options with an expiration date of Aug. 19, 2022. Volume came in at 10,290 contracts against an open interest reading of 189.

Moreover, the bid-ask spread was fairly tight for a transaction that doesn’t get much airplay. As represented by the midpoint price ($1.25), the spread came out to 8%, reflecting relatively large liquidity for the trade.

As well, market makers appear to have reasonable confidence in facilitating this transaction. In most cases, these market specialists prefer to keep the delta – or the theoretical range of movement an option’s value may spark based on a $1 movement in the underlying security – of their positions close to zero.

Loosely speaking, narrower bids imply greater predictability in the underlying security and therefore, market makers offer a more attractive entry point to traders. However, if the underlying security swings wildly, there is less confidence where it might end up. In response, market makers are forced to offer wide spreads, in part to protect themselves.

While it’s impossible to decipher everything there is to know about GT stock in a single transaction in the derivatives market, the relative confidence in the trade is intriguing.

The Rationale Behind the Tire Play

Although Goodyear still remains a risky proposition given a possible incoming recession along with its less-than-stellar history in the market, GT stock isn’t entirely speculative. Indeed, the unique circumstances stemming from the COVID-19 pandemic make it somewhat interesting for those with a stomach for volatility.

As prices continue to rise, many households find themselves unable to make financially significant purchases. Therefore, it’s not surprising that the average age of vehicles on U.S. roadways hit a record 12.2 years in 2021. Clearly, consumers are doing everything they can to make their dollars stretch.

Admittedly, this narrative appears to run counter to the bullish thesis for GT stock. However, at some point, tire replacement becomes unavoidable. Further, it’s much cheaper to replace a set of tires than it is to buy another vehicle, let alone dealing with catastrophes directly resulting from worn-out tires.

In addition, most of the population of the U.S. lives in the eastern half of the country. Naturally, these regions feature much more variable weather than say in California. Thus, tire integrity is an even more important issue for most American drivers.

Usually, all it takes is for one scary incident to set people on the right path, even if it’s costlier at that moment.

Only for the Brave

Nevertheless, despite some interesting positives for GT stock, the bullish narrative is only for risk-tolerant investors. Even then, it should probably only be approached with money that one can easily afford to lose. Again, Goodyear hasn’t proven to be a great investment historically.

Still, to end on a positive note, tires also represent a safety consideration. With the risk of catastrophic incidents beginning to outweigh the benefits of dangerously stretching a dollar, GT stock does have an outside chance of upside success.

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