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:
- Valuation. Ford is a 8 P/E name with projected earnings growth averaging 10-15% over the next 2 years.
- 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.
- 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.
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.