Name That Trade – $F: Autos Asphyxiating

by CC September 29, 2015 3:11 pm • Commentary

Automakers have been in the news of late. In case you missed it, Volkswagon of Germany got stone cold busted earlier in the month for years of spoofing emissions results in millions of their “clean diesel” cars.  The stock is down 42% since the Sept 18th charge, and down 65% from its 52 week highs in March.

While this is fairly stock specific there are so obvious takeaways that could be positive for U.S. autos like Ford and GM.  Oddly, shares of Ford have sold off in sympathy to the tune of about 10% since Sept 18th, down 15% on the year and down 22% from its 52 week highs made in March, and now hovering above short term technical support at $13:

Ford ytd chart from Bloomberg
Ford ytd chart from Bloomberg

Call volume is running hot today, nearly 2.5x that of put volume with one decent size trade caught our eye.

When the stock was $13.10, a trader bought to open 12,000 November 14 calls for 28 cents.  These calls break-even at $14.28 (up 9%) on November expiration. Nov will catch Sept auto sales on Thursday, Q3 earnings on Oct 27th and then October sales on November 1st (the last is less important than Sept as we will just have gotten Q3 results).

This options trade is a great example of options that appear to be dollar cheap, but are expensive in vol terms.  The calls seem dollar cheap as they were bought for just 2% of the stock price and break-even where the stock was just 7 trading days ago.  In vol terms though, they are expensive. With short dated options prices approaching levels reached on August 24th when the stock supposedly traded as low as $10.50.

[caption id="attachment_57237" 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]

If I were positively disposed to Ford, and thought monthly sales and next month’s earnings could serve as a positive catalyst I would possibly look to buy the same calls, despite appearing expensive in vol terms, but look to offset some potential decay by spreading them.

For instance with the stock at $13.13 you could buy one of the Nov 14 calls for 28 cents and sell one of the Nov 15 calls at 8 cents, making the Nov 14 / 15 call spread for a 20 cent debit. That breaks-even at $14.20, with a max profit of 80 cents at $15.  The options market is saying there is only about a 12% chance that the Nov 15 calls will be in the money on Nov expiration.  $15 also seems to be very formidable technical resistance, just below the August breakdown level and its 200 day moving average.  We don’t share a strong view on auto stocks, and certainly not a near term bullish one, but think the call activity was worth mentioning nonetheless.