Ford Motor Company (F) held an investor conference on October 2. Among the many announcements they made, the biggest takeaways are that they are entering into the electronic vehicle market as well as some impressive sales numbers. They even have a team assembled to speed up the development of these new vehicles.
And since the conference, Ford’s stock is trading above $12.25.
Now while that is a low stock price, let’s face it… nobody buys a single share of a company. Smart traders like you prefer to control larger portions of stock.
And this strategy will give you higher profits with a much lower sticker price…
Here’s What the Numbers Say – Ford is Clearly the Winner With Options Traders
Ford Motor Company’s sales increased 8.7% overall, with the brand increasing by 9.1%. There were a couple of items that attributed to this increase in sales: successful discounts offered and a need to replace vehicles damaged by the hurricanes. In fact, an economist at the research firm Cox Automotive estimates that number to be 600,000 vehicles that need to be replaced in Texas and Florida.
Other auto makers have seen a similar rise in sales, including General Motors Company (GM), who reported an increase of 12% this past month versus their sales from a year ago during the same time period.
Option trading volume spiked a few hours after the markets opened on Tuesday, with reports of 36,141 calls and 17,413 puts changing hands. That is a 400% increase from the normal trading volume at that time of day! And the most highly-traded contracts were focused on the Ford October 6, 2017 $12 put options. At the time, these puts accounted for 10,674 contracts traded from that over 17,000 total.
Here’s a snapshot of open interest on the calls and puts for Ford. What this shows is a balance of October calls and puts being traded.
The bullish traders (those who expect Ford’s stock to increase in price) are focused on the October 6, 2017 $12.50 calls, giving an indication that bullish option traders are expecting Ford to move higher than the $12.50 strike. And the bearish traders (those who expect the price to decrease) are focused on the October 6, 2017 $12 puts, indicating those traders are expecting a short-term move to under $12.
Now let’s take a look at the “put/call ratio.” The put/call ratio is a contrarian indicator that shows if too many investors are interested in puts, you should consider buying calls – and vice versa. And the way that this is calculated is by dividing the day’s put volume by the day’s call volume.
Here is a recent snapshot of the put/call open interest results. As you can see, the put/call volume is focused on more puts than calls right now.
While Ford hasn’t been considered a high-growth stock for a number of years, it is up from its 2017 yearly low of $10.56, which it hit on August 18. At a current price above $12.25, that is an increase of $1.33 (or 16.7%) from the year’s lows. The stock is nearing an overhead patch of resistance established in the first quarter of 2017 with a price range of $12.20-$12.90. We’ve discussed breakout patterns before, so click here for a quick refresher on how to profit from them.
There is also the possibility that, before Ford goes higher, it will refill the gap established by these increased sales numbers. If they settle back into that gap, we could see the stock price back at the $12 price.
Now if this happens, there is a very specific strategy to use in order to profit…
This is How to Play Ford
The time spread strategy, which is also known as a calendar spread, is the best strategy to use.
Now this is a different twist on the covered call theme, which we’ve discussed before here. Instead of buying the stock to write or sell calls against, where you would choose to buy an option a few months out, or even better, a Long-Term Equity Anticipation Security (LEAPS) option. Then, you would look for ideal opportunities to write or sell a call in the current or next month.
The benefit of this strategy is that you are able to write these shorter-term monthly calls and generate cash into the account upon expiration, if the options expire without being exercised. That means you keep the longer-term option and repeat the process by selling another current or front-month expiration option, bringing in more money. Then, the next option hopefully expires without being exercised. When you repeat this process enough, over several months, the sold option premiums offset the cost of the options, in this case LEAPS.
Eventually, it starts to become monthly income that is profit to the account.
The benefit is that you pay less for the LEAPS option than you would for the stock outright – and you have less cost to overcome in the sales of shorter-term call options.
With less cost to cover, you receive profits much sooner than you would if you had to cover the cost of a stock purchase.
But if you’re looking for a way to score triple-digit gains on big name stocks even faster, you need to see this.
To your continued success,
Tom Gentile
