Ford (NYSE:F) stock rallied 2% on Monday, but that has been a rare occurrence of late. In fact it is giving back almost half of it this morning. F stock has been languishing among its peers for a long while. Sexier stocks like Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) stole the headlines, but Ford could be the surprise of 2021.
It’s a mistake to count this great American company out because when management has its back against the ropes they come through. And they do seem to be on the ropes. The F stock price action has been horrendous, down 33% year-to-date when TSLA is up 190%.
Wall Street lost its interest in Ford partly because management gave them no reason to pay attention. Add to this that the competition leadership is the exact opposite of quiet, and you get a nasty formula where bids run away from Ford and into the other red hot stocks. TSLA is breaking records and now is the most valuable car company on earth. Odds are that there will be a reversion to the mean in the next few months and Ford could have a catch up trade brewing into next year.
Conviction is not bulletproof, because when a team loses for this long, it must stay humble with forward expectations. The bulls are battered, so they need to take baby steps before they can run again.
The recent news about the Bronco lineup could be just the thing to spur interest.
The tricky bit would be to carry that momentum forward — it’s up to management to keep the buzz alive. The potential is definitely there and from the chart aspect, the downside risk is finite against the Covid-19 crash bottom.
Bet on the F Stock Bounce into Next Year
The upside bet is to buy the shares and target a rally to $12, but this won’t be easy because of several line of resistance. Basically every ledge that they tried to hold in the way down will be tough to overtake on the way up. This makes F stock a good candidate to trade via options where investors can mitigate the out of pocket expense while they wait this opportunity out.
Instead of buying shares, traders can buy the March 2021 $7 calls for 70 cents per contract. This locks the stock price at $7, so if it rallies to its upside potential then they only miss out on the starting point. This reduces the hard cost risk, because the maximum this trade can lose is the price up front for it.
In addition, those who want to own Ford stock can also sell the March $5 put and collect 50 cents for that. This part of the trade doesn’t even need a rally to win. In fact, the stock can fall another 16% from here and it would still break even. Taking both trades together make investors very long the stock and at a minimal 20 cents out-of-pocket expense.
There are Serious Extrinsic Risks Looming
It is important to note that this stock doesn’t trade in a vacuum. The overall stock market is at or above all-time highs which ads extrinsic risk to F stock. Wall Street could be due for a pull back and that if it comes would hamper the upside potential for this trade too. In reality, the so-called fear gauge — the CBOE Volatility Index (VIX) — is still twice its average, which confirms the risk. Going too long with strong conviction means ignoring said risk and borders on recklessness. Taking partial positions makes sense until this face off between bulls and bears on the street abates.
Sentiment is the driver of stock prices, and it flipped positive on the back of two employment reports. But these are telling only half the story, because we still have 19 million weekly ongoing unemployment claims. The government also reported a national unemployment rate of 11% which quite frankly I think is understated.
Nevertheless, this is still way too many people out of work for stocks to be making new highs like they are now. I am bearish in my bias going into year-end because as soon as the election is over, the stimulus incentives will end. Only when the government morphine stops pumping into the U.S. economy will we know how sick this market really is. .
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.