Ford Motor Company (NYSE:F) faked me out a couple of times this recently thinking it was going to have a nice breakout from $12.5 per share. Ford stock had a tight squeeze, but the move turned out to be a breakdown instead.
I had better luck creating income from trading the range like in this 50% yielding iron condor.
I am not a fan of the auto industry’s fundamentals. They always seem to have a few major issues at hand. If it’s not labor issues, then it’s recalls or regulatory pressures. Now there is talk of an auto credit bubble and peak auto. All this uncertainty is hardly inviting me into F shares, even after this dip. While it’s near proven support, it could get cheaper.
Fundamentally speaking, F stock is not expensive, boasting a price-to-earnings ratio of under 10. Furthermore, analyst expectations leave room for upside revision possibilities than disappointments.
Threats to Ford’s stock price can sometimes come from other stocks. I see a scenario where General Motors Company (NYSE:GM) stock can get hit and cause a sympathy down move in F. In fact, General Motors seems vulnerable to a significant dip considering it’s not near proven support.
In my writeup today, I’ll share an entry strategy that will allow you go long Ford with room for error.
How to Trade Ford Stock
The Trade: Sell the Jan 2018 $9.75 put and collect 50 cents per contract. This is a bullish trade where I collect a premium for the opportunity to buy F stock at a 14% discount from today’s price. If it falls below $9.25, I would accrue losses but would still be better off than buying F today.
Usually I like to sell opposing risk to hedge my bet. But in this case, Ford stock has correctly sharply, so I’d rather invest some money into a temporary hedge that will carry me through July.
The Temporary Hedge: Buy the $9 Jul put for 5 cents. I call these sacrifice puts so I can sleep well through July. If the markets crash and Ford stock goes along with it, I know that my worst-case scenario is covered for the next few months.
Markets are still near enough all-time highs that we have enough reason to worry, so caution is warranted.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
