New Trade $F – Much Cheaper Way to Play U.S. Housing

by Enis November 16, 2012 1:48 pm • Commentary

Here is a preview of what I will be discussing tonight on Options Action on CNBC at 5pm:   

The U.S. housing market has gotten a lot of press in the past 6 months, and the housing stocks have of course been on a tear.  Here is the chart of the homebuilder index, HGX, over the last 3 years:



Clearly, the past 6 months have been a breakout run for this sector.  The fundamental theme makes sense, but buying the homebuilders here is a risky trade, both from a fundamental standpoint (all sporting P/E’s above 20) and a technical standpoint (stretched).

Ford is a name that benefits from the housing theme indirectly, but is priced much more cheaply, with a better technical setup to boot.  Here are 3 reasons why I like Ford as a long here:

  1. Valuation.  Ford is a 8 P/E name with projected earnings growth averaging 10-15% over the next 2 years.
  2. Housing Turnaround.  Ford is a much cheaper, low-risk way to play the improved housing outlook in the U.S.  Homebuilders and building materials stocks have priced in the turnaround and then some, while Ford is a huge beneficiary to the story, but it’s not priced in.  More than 60% of its revenues come from the Americas.
  3. Current dividend yield and potential yield.  Ford actually pays a 2% dividend at the moment, and some analysts project that it could increase the dividend next year.  Contrast with GM, which offers no yield.
Technically speaking, here are the charts from Carter Worth:
Testing short-term uptrend line on this pullback
Inverse head and shoulders, retesting the breakout
Retesting breakout from long-term downtrend
Putting it all together, both Carter and I like Ford, for both technical and fundamental reasons.  Here’s the trade:
TRADE: F ($10.45) Bought the Feb13 11 / 12 Call Spread for $0.25

-Bought 1 Feb13 11 Call for 0.40

-Sold 1 Feb13 12 Call at .15

Break-Even on Feb13 Expiration:

-Profits of up to 0.75 between 11.25 and 12, max gain of 0.75 at 12 or higher.

-Losses of up to 0.25 between 11 and 11.25, with max loss of 0.25 below 11.


Trade Rationale:  I chose a Feb13 expiry call spread because I wanted to catch the next earnings report by Ford.  Ford reports in late January, and given the strength of their last earnings report, I think implied vol will stay bid until then.  As a result, this call spread is a cheap way for me to participate long delta right now, but also give me exposure to the event if the trade is not a winner yet.