We all know it, yet it happens over and again. That is, markets overreact to headlines. Case in point, the recent selloff in Ford Motor Company (NYSE:F) stock. F stock fell 10% in mere days and I took the opportunity to go long both F and General Motors Company (NYSE:GM) stock. Talk about fast profits.
No, I’m not gloating. Because today I want to add to my bullish bias. The recent correction provides downside targets against which I can sell risk to generate income, hassle free. For instance, despite not having impeccable timing, this recent F trade still delivered profits.
Click to Enlarge Fundamentally, nothing much has changed of late except perception. Auto manufacturers are selling as much as the global consumers can support. Along the way they come across temporary challenges that cause short-term price gyrations, and therein lie most of the opportunities.
The Thesis: We have likely seen the lows in F stock for 2017. And if it falls below them, I am willing to own Ford provided that the current macro conditions persist. To do this, I will use the options market where I can commit long, but while leaving a large margin for error. This is a healthy alternative to buying the shares now in the open market.
The Trade: Sell F Dec $11 puts naked. I collect 70 cents per contract to open this bullish trade, and I just need Ford to stay above the strike price to win. Otherwise, I would own the shares and suffer losses below $10.30. These would be levels not seen since 2012, and I would be very comfortable owning F stock with a 10% buffer from current price.
Selling naked puts is not suitable for all investor, however, and for those I can use spreads.
The Safer Alternate: Sell F Dec $10/$9 bull put spread where I have 80% chance of success and with limited exposure. Yet, this trade can still yield 15% on risk. Compare this with spending $11.50 now and hoping that Ford stock rallies 15% from here just to match the performance of the spread.
Keep in mind, though, that selling options is dangerous. That’s why I never risk more than I am willing to lose.
Learn how to generate income from options 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.
