Name That Trade(s) – $F: Live Transmission

by Dan July 27, 2015 2:21 pm • Commentary

Event: tomorrow before the open Ford (F) reports Q2 results. The options market is implying about a 4% one day move which is rich to the 2% average over the last 4 qtrs.  With the stock at $14.43 the July 31st weekly 14.50 straddle (the call premium plus the put premium) is offered at 62 cents. If you bought that, and thus the implied move, you would need a rally above $15.12, or decline below $13.88 to make money, or about 4%.  The absolute move appears like a bit of a stretch, but when you consider that last week the stock was up nearly 8% (Thursday morning) after reporting better than expected results (only to close the day up 4%), it appears that options market makers are not taking any chances here.

Price Action / Technicals:  Ford is down 7% in 2015, and down 14% from its 2015 highs made in March, and quickly approaching what appears to be decent technical support at $14:

[caption id="attachment_55669" align="aligncenter" width="600"]Ford 1 yr chart from Bloomberg Ford 1 yr chart from Bloomberg[/caption]

A seven year chart from the end of the financial crisis shows the greater significance of the $14 level in the near term, and what appears to be massive support at $10:

[caption id="attachment_55670" align="aligncenter" width="600"]Ford 7 year chart from Bloomberg Ford 7 year chart from Bloomberg[/caption]

Volatility SnapShot: For longs, stock replacement strategies could make sense if you are the belief that the recent weakness in Chinese economic data, and the extreme volatility in their equity markets of late sets the stage for increased risk to our equity rally, as 30 day at the money implied vol in F options are 26%, which is well below the 52 week high of 38.5%.

[caption id="attachment_55671" align="aligncenter" width="600"]Ford 1yr chart of 30 day at the money implied vol from Bloomberg Ford 1yr chart of 30 day at the money implied vol from Bloomberg[/caption]

Ford is somewhat vulnerable to China as it’s a key growth area for the big automakers. Ford sells over a a million new cars in China a year but growth has been shaky this year as prices have been cut by competitors amidst a potentially slowing economy. So here are some trade ideas depending on your current positioning and inclination for both the event and the coming months.

Potential Trades (vs stock at $14.43):


If I were looking for play for a short term bounce like we saw last week in GM, I would:

Buy July 31st weekly 14.50 calls for 20 cents.

Breakeven on this trade is very close and if you saw the stock get back above 15 you’d be sitting pretty.

If I were looking to replace an existing long, and use options as a stock alternative, I would:

Buy Sept 15 calls for 24 cents

Also a play for the stock to get back above 15 and hold but this trade gives it time to play out vs worrying about holding stock with a lot more risk than .24 here.


If I were looking for a test of $14 in the coming weeks/months, with a possible move below by year end, I would:

Buy the Aug/Dec 14 put calendar for .45

This is arguably tight on the August put sale but there’s very few other ways to play for a breakdown of the stock over the next few months without feeling like a press near recent lows.