Last year, I delivered results trading Ford Motor Company (NYSE:F), the easiest of which was a range trade that yielded 50%. This year I am chasing a potential breakout that has been slowly developing.
Fundamentally, Ford has good management pedigree. They weathered the effects of the 2008 financial crisis as well as could be expected. For the last few years we’ve had record vehicle sales.
Therein lies my frustration with this breakout. Everything is going the auto manufacturing industry, yet their stocks have yet to wow us. Ford stock has been in a descending trend for almost two years.
Click to Enlarge Equity markets are at all-time highs. With auto sales also at or near record levels, I expect better performance from F stock. For some reason it’s mired under $13 and in a descending trend. General Motors Company (NYSE:GM), on the other hand, has enjoyed an ascending 12 month trend.
Even so, I still like the Ford trade better.
Technically, the recent price action in F stock has been building energy. We see lower highs and higher lows coming to a tight point. This energy needs to resolve itself soon. Unless there is bad news coming from Ford or a general equity correction, the move should be to the upside.
If that happens, it could rally 8% to 10%. Today I want to set a pair trade to capture the upside breakout.
F Stock Trade Idea
The Bet: Buy the F May $13 call for 23 cents per contract. This will give me over two months to capture an upside move.
To lower my out-of-pocket expenses, I will finance the bet by selling risk against lower levels of Ford that I deem safe given the current environment.
The Bank: Sell the F Sept $11 put and collect 35 cents. This is a bullish trade that commits me to buying F stock if price falls below it. I have an 85% theoretical chance of having F stock stay above my sold put. I only sell naked puts if I am willing to own it there.
Taking both trades means that I am getting paid to bet on a Ford stock rally. Even if nothing happens, I would be left with a net credit. As long as the price stays above $11 per share, any premium I collect from selling back the May call is pure profit.
Since I am not required to hold my trades open through expiration, I can close any of them for partial gains or losses at any time.
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.
