Ford Motor Company (NYSE:F) stock is not having a good year. Ford stock is -8% year-to-date but it is out-performing its major competitors like General Motors Company (NYSE:GM), Toyota Motor Corp (ADR) (NYSE:TM), and even Tesla Motors Inc (NASDAQ:TSLA)
Fundamentally, I am not a fan of the auto sector for credit spreads. They are vulnerable to surprise headlines at any point. But from time to time, I find an interesting trade with favorable ranges. Luckily, the options markets offers infinite ways of setting up trades to match any thesis — including today’s idea on F stock.
Click to Enlarge Technically, Ford stock has been trading in a descending channel. It recently violently bounced off a seven-year old pivot level and is approaching the middle of the 12-month range. This gives me levels against which I can set trades.
Trade #1: Sell the F Dec $11/$10 credit put spread for 16 cents per contract. I have an 85% theoretical chance of success to earn a yield of 18%. I am somewhat comfortable with this level since it was recently tested on the Brexit swoon. This trade can survive a 14% drop from current price. My breakeven level on this side alone is $10.84 per share.
Trade #2: Sell the F Dec $14/$15 credit call spread for 19 cents per contract. I have a 70% theoretical chance of success to earn a 23% yield on money risked. This price buffer of 9% from current price is a little tighter than ideal, but I will tolerate it in this pair trade. Breakeven on this side is $14.19 per share.
Taking both trades would set me up with an iron condor. This is a self-hedged trade that needs F stock to stay between $11 and $14 per share through 2016. My overall breakeven levels are $10.65 per share and $14.35 per share. The overall yield jumps to an aggressive 50%.
If I am strictly bullish Ford stock, I can simply opt out of bearish trade No. 2 and settle for a chance to earn an 18% yield going long F shares at $11 each.
Self-hedged trades reduce the dollars at risk but increase the chances for loss since they could lose in either direction. That said, they also give me more conviction in my trade. I can tolerate F stock price moves against my sold spreads with less stress. One side gets under pressure while the other side relieves it.
Another note of caution is the fact that this is a December setup, so I will have to worry about big moves through earnings. I am not obligated to hold either of these spreads into expiration. I can close either at any time for a partial gain or loss.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
