Betting on Ford: Ugly Stock, Intriguing Options Opportunity

The recent market turmoil and has offered up lots of mind blowing prices on many financial instruments. Common stocks with 10% yields are common. Preferreds with yields of over 30% no longer even raise an eyebrow. With most of these, however, there is a very real doubt as to whether their investors will continue to be paid.

Rather than searching for yield through dividends, I prefer to generate income by selling covered calls, as long as I'm getting paid for my downside risk. One stock I have been following recently is Ford (F). Not because I like the stock -- in fact I think that the most likely outcome is for the company to eventually go broke -- but because I am looking for find a way to sell the near term options which are hideously expensive.

Right now you can sell Jan 09 $2.50 calls for about $.40. With the stock trading at $1.40, that makes the net cost an even dollar, and means that even if the stock does not move up from here you pocket a 40% return in just two months. Even better, if the stock does manage to rally between now and then (can you say government bailout? sure you can!), your maximum upside is 150%.

There is no such thing as a free lunch, of course, and the biggest risk is that Ford quickly runs out of cash, your stock goes to zero, and you lose the one dollar that you have invested. Looking at Ford's balance sheet, however, it would seem that they have plenty of liquidity for at least another year or two, even under the most dire assumptions.

And the great thing about this position is that you don't need Ford to thrive, just to survive with a stock price over, say .50 for you to be able to sell short term options again and again.

As long as there is some hope for a rebound, selling those options should translate into a very hefty return. Of course, if Ford manages to cheat death one more time, well, that would just be icing on the cake.

Disclosure: Author holds positions in F

Comments

[Dan Weiss:]

You could sell the March 3's for about 0.60 if you think they will survive until a bailout or for some the January 2010 2 1/2 or 5 could be interesting. Now ,personally I like the bonds of GM which are extremely attactive at current levels (they actually sell for less than the equity in some cases) and would likely give holders some value even if GM went bankrupt unlike the equity.

Disclosure: I have bought both GMW and RGM (these are traded on the markets but are senior unsecured debt) with yields close to 60%. Both have a $25 par value and are selling at just below $2.50 or less than 10 cents on the dollar.

2008 Nov 23 04:50 PM

[Dividend Gr...:]

I also think that GM bonds are a much "safer" investment than GM stock at this moment. The covered call on Ford could be a nice idea as long as the stock doesn't fall a lot.

2008 Nov 23 06:03 PM

[Paul Killinger:]

Interesting. I like your idea more than taking a trip to a casino.

2008 Nov 24 10:54 AM