Name That Trade – $F: Ford Pick-up?

by Dan February 6, 2015 12:58 pm • Commentary

This morning’s better than expected January jobs print and the the upward revision to December, coupled with a slight pickup in wages reinforce bullish themes about the pace of the U.S. recovery.  This, coupled with the January Auto sales which were the highest in a decade are positive backward looking data points that should be no means be dismissed as a one off blip.  It’s hard to argue that the U.S automakers won’t have a fairly healthy wind at their back if we continue to see wage inflation, which is the one ingredient that has been missing in the last 5 years as the employment rate has retreated from north of 10% to the Jan print of 5.7%.

We traded GM from the long side on a few occasions last year as the stock hit oversold levels following all the recall announcements, but today I want to look at Ford (F) after their eye-popping January sales that were up 15%, the largest Jan retail gain since 2004.

Ford is a cheap stock, with a dividend yield of 3.75%, trading 10x 2015 expected earnings growth of 37%, and 19% in 2016, on 7% sales growth.

Technically the stock has traded in a range between $13 on the downside and $18 on the upside for the last 2 years, with the stock now just above the midpoint below $16 which happens to be the stock’s 200 day moving average (yellow line below):

Ford 2yr chart from Bloomberg
Ford 2yr chart from Bloomberg

A breakout above $16, combined with solid sales data in Feb and March could see the stock re-test the double top highs of $18 in 2013 and 2014.

Options prices seem fairly reasonable, with 30 day at the money implied vol down sharply from the recent spikes in Dec and Jan and could offer an attractive entry for those with a directional view who want to express with long premium:

Ford 1yr chart of 30 day at the money IV from Bloomberg
Ford 1yr chart of 30 day at the money IV from Bloomberg

If I were to play from the long side I would likely look to May expiration as it will catch Feb, March & April monthly sales and Q1 earnings that should come in late April.

I have one problem with a long entry here, the stock is up 11.5% since last week:

Ford 10 day chart from Bloomberg
Ford 10 day chart from Bloomberg

So I would like the stock to re-trace a bit, possibly back to $15.50 before I pull the trigger, but here is the trade I would choose at the moment if I just couldn’t help myself:

Hypothetical Trade: F ($15.90) Buy to Open May 16 calls for .70

Break-Even on May Expiration:

Profits:  above 16.70, up 5%

Losses: up to .70 between 16 and 16.70 with max loss of .70 or 4.5% of the underlying stock price.

Rationale:  Given the stock’s recent volatility, and the general cheapness of options, risking 4.5%for 3 months, with no shortage of stock specific data in between these calls seem dollar cheap. But I’d rather pay less for them on a slight pullback and catch the potential breakout above 16, offering the potential to spread by selling a higher strike call to reduce my break-even and premium at risk.