So you think Ford Motors has some upside potential but you are not too sure how to play it. I think that their is indication that this company is not in threat of a major sell off any time soon, but I also don’t think it has the guts to rally MUCH higher. What I think we should do is one of two things: covered calls or butterfly spreads. Let’s look at the charts first!
As we can see from the chart, the last trend to reverses was going from the down trend to a new uptrend. Seeing this with a solid RSI number above 50, I think this reversal may have some sustainability. That being said, the CCI and MACD weakness will probably make it a slow, sideways “feeling” climb. I think Ford could climb up over 8 but will likely hover around 8 for quite some time as this market decides if she wants to top or not.Covered Call Implementation
The first thing we do is buy Ford stock at the open market price of $7.65 per share. For every 100 shares we buy, we sell 1 call option against it. Reason being: each call option controls 100 shares. So the call option we sell against the position is going to be the 8 strike call for December. This leaves us $0.35 of price appreciation, combined with the $0.50 premium we can sell the option for. In the end, we have a max profit of $0.85 on a $7.65 investment. Not too bad!
Butterfly Spread Implementation
In this case, we are hoping that the stock is going to peg out at $8 per share at expiration in December. So in order to do this, we will sell 2, $8 strike call’s for $0.50 each, buy 1 $7 strike call for $1.02, and buy 1 $9 strike call for $0.22. This equates to a $0.24 debit per share, or $24. If the stock closes at $8 per share on expiration, the spread will be worth $1.00 per share, or a profit of $0.76 per share. If you risk $0.22, and make $0.76 from it, thats a nice profit of over 300%. Higher risk; higher reward.
Our breakeven points on this spread are $9.00 – (0.24 (debit) = $8.76 and $7.00 + 0.24 (debit) = 7.24. So if Ford’s stock closes between 7.24 and 8.76, we break even. If the stock trades outside of this zone, you may want to consider stopping out the position as the probability of it expiration at a loss, or total loss, would be increased at that point in time.
Good luck and happy trading!
Disclosure: No Position in Ford