Ford Motor Co. (NYSE: F) shares are trading higher today as automakers are getting a boost this morning before the General Motors (NYSE: GM) 11 AM strike deadline with the United Auto Workers. Investors believe that this deadline means an agreement will be reached today. Furthermore, the auto sector is seeing continued gains based on optimism created by the Fed's rate cut last week. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on Ford.
After hitting a one-year high of $9.70 in June, the stock has sagged a bit over the past couple of months, though it has been moving higher recently. Ford opened this morning at $8.47. So far today the stock has hit a low of $8.36 and a high of $8.59. As of 10:55, Ford is trading at $8.57, up $0.34 (4.1%). The chart for Ford looks bearish but improving slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $7 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 7.1% return in just 3 months as long as Ford is above $7 at December expiration. Ford would have to fall by more than 18% before we would start to lose money.
Ford hasn't been below $7 since December and has shown support around $7.50 recently. This trade could be risky if the company's earnings (due out in mid-October) disappoint or if the union issues become an even bigger deal, but if that happens, this position could be protected by the trading range the stock has been in for the past year, which has been between $7.50 and $9.
Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in F or GM.
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