Speculating With Options On Ford

Mar.30.12 | About: Ford Motor (F)

There always seems to be widespread worries among investors regarding automobile companies and the industry at large. Some of these worries include an overseas slowdown, worries over high gas prices and changes in leadership, just to name a few. Since Ford's (NYSE:F) run to the $13 level in late January 2012, the stock has traded in a channel. As an options trader, I sometimes like to trade stocks in channels since you have technical data to see how the stock will perform.

Chart forFord Motor Co.

Ford has had some news in the last three months that can be perceived as both positive and negative. Currently, with Ford trading in a channel (between $12 and $13), Ford shares could be perceived as stalling out. I recently read an article by Shane Blackmon that gave some reasons for Ford's shares to stall in 2012. I will let the readers decide if Ford will stall out for 2012. I generally agree with the reasons the author has provided, since these reasons have been known for some time. While it's tough to dispute the facts, it's how we interpret the facts that can lead a contrarian investor to profits.

With the way Ford is trading year to date, being a bull on Ford can be tough due to possible limited upside. I believe there will come a point sometime in 2012 that Ford will break upward past $13 or go below $12. One catalyst that can play in Ford's favor is the strong US consumer and I believe the US consumer will help drive Ford shares higher. With the weakness that Ford will have coming out of Europe and a possible China slowdown, it can sometimes be easy to pull out the bear flag.

In the short term these worries should be considered, but in my opinion Ford can sometimes be overlooked as a play on the US consumer. In the last couple of years it was wise to keep your older car since most consumers opted to save money rather than make an expensive automobile purchase. But, with Ford continuing to make improvements in science, engineering and better fuel economy, a strong consumer will eventually look towards purchasing a new automobile.

The Wall Street Journal published a report on March 1, 2012 on February automobile unit sales. Ford is leading the pack with 23,350 Ford Focus's sold, or up 114.6% from February 2011. This compares to General Motors (NYSE:GM) Chevrolet Cruze that sold 20,427, or up 10.1% from February 2011. Ford's truck sales are also showing positive numbers as continued bullishness in construction employment can help sales of trucks. If Ford can continue to produce positive US automobile sales, this can help mask the problems that are taking place in China and Europe.

On the leadership front, Ford recently had changes at the CFO and it has been rumored that Ford's CEO Alan Mulally may retire soon. The CFO position has been filled and I am looking forward to Alan Mulally passing the keys to someone who has worked under him. A lot of Ford executives have had a long tenure with the company and while some might interpret Alan Mulally retiring as bearish, I'm looking forward to someone being selected with strong overseas industry experience to reinvigorate foreign sales.

High gas prices are another item that can be interpreted as either bullish or bearish. If you believe high gas prices are here to stay, then investing in a fuel efficient vehicle can help consumers save money throughout the life of their automobile. Over the years Ford has continued to improve the science, engineering and fuel economy of their entire fleet. A cost conscious consumer doesn't play well for Ford, but a stronger consumer will think about an automobile purchase as an important investment and not just another car.

Ford shares can be seen as being in a tug-of-war between bulls and bears in the short term. In the long term, I like the prospects of Ford being a play on the US consumer despite ongoing challenges. In the short term I believe Ford will continue to bounce back and forth in the $12 to $13 channel range. Ford may trade in this channel for some time and if you believe that the channel will remain intact, then here is an options trade that can work if Ford can bounce off its support of $12.

Trade # 1 Buy June 16 2012 $10 in the money call for $2.35

Buying an in the money call option for a fraction of the price of a company's stock can be viewed as a cheaper way to play Ford by risking less to make more. Rather than pay $1,230 per 100 shares of stock (stock price currently at $12.30), using an in the money call option gives investors the ability to profit off small movements with a low break-even point. For examples, please refer back to my previous article here.

Cost of 1 call = $2.35 or (2.35 x 100 = $235)

Breakeven = Strike 10 + cost of call bought 2.35 = $12.35 or a 0.06 move to break-even, which represents a 0.50% price movement.

Delta = 0.90

Days till expiration = 80

If you believe that Ford can bounce off the $12 level as it has before, then this strategy will be profitable. I would be looking to exit the trade as Ford gets closer to $13.

Trade # 2: Buy June 12/13 vertical call spread

This is a risk defined trade if investors believe Ford will bounce off the $12 level, but struggle getting past $13.

Buy 1 $12 call for 0.78 (0.78 x 100 = $78)

Sell 1 $13 call for 0.35 (0.35 x 100 = $35)

Price of call bought $78 - price of call sold $35 = $43

Breakeven = call bought 12 + 0.43 = 12 + 0.43= 12.43

Days till expiration = 80

The vertical gives you protection, but you will have a higher break-even point which can be met if Ford rises around 1%. For those of you just thinking about buying the $12 call, your break-even will be $12.78. Ford would need to rise over 4% to hit your break-even point. Investors will profit on the rise up, but I like the risk/rewards of a lower break-even point - especially on stocks that have a high beta.

For myself, I don't mind making a speculative bet from time to time if cheap opportunities present themselves. I don't consider Ford to be a speculative company, but the way Ford has been trading lately, this can be the set up for a cheap speculative trade. I believe that Ford's bearish tones will eventually turn into bullish interpretations and I believe options provide an alternative opportunity to profit off small movements in the stock price.

Disclosure: I am long FORD.

Additional disclosure: I currently own a Ford truck and June 10 calls