Ford Motor Co. (NYSE: F) stock is falling this morning with other automakers as economic indicators suggest that the economic slowdown could accelerate in the next few months due to rising costs and the slumping housing market. The Conference Board's index of leading indicators fell by 0.5% in October according to numbers released this morning. Also hurting car makers is a report today that claims the sub-prime mortgage crisis has hurt Ford's competitor General Motors (NYSE: GM), whose stake in the financial firm GMAC has led to about $750 million in losses through the first nine months of the year. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on Ford.After hitting a one-year high of $9.70 in June, the stock has declined over the past five months. This morning, F opened at $7.05. So far today the stock has hit a low of $6.87 and a high of $7.06. As of 11:30, F is trading at $6.95, down 0.28 (-3.9%). The chart for F looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $9 range. A bear-call credit spread is an options position that combines the purchase and sale of call 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 14.3% return in 7 months as long as F is below $9 at June expiration. Ford would have to rise by more than 29% before we would start to lose money. Learn more about this type of trade here.
Ford hasn't been above $9 since June and has shown resistance around $8.80 recently. This trade could be risky if the US economy becomes re-invigorated, but even if that happens, this position could be protected by the resistance F has formed between $8 and $9 over the past three months.
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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Reader Comments (Page 1 of 1)
11-26-2007 @ 2:05PM
Sandra Gilbert said...
The American Auto picture always seem so glum and dume to reporters who report the news. If these reporters would send out promising messages, the Auto picture will change. YOU are the ones with the paint and brush! Let's begin to use bright colors instead of dark colors! On the other hand, Nissan just recalled over 200,000 vehicles. What did you report about this! If it were GM or Ford, it would be all over the bloggingStocks!