No, that title's not a misprint and you don't have déjà vu. Japanese automaker Toyota Motor TM is under fire again because of another recall, which this time impacts 1.7 million vehicles worldwide. The culprit this time is a fairly broad one – “defective parts” – including but not limited to leaky fuel systems.
In the U.S., the recall is expected to impact about a quarter-million Lexus vehicles. The majority of the impacted autos were sold in Japan. This latest recall brings the total number of Toyota vehicles recalled to more than 15 million globally since late 2009.
On the “plus” side, arguably, is the company's transparency surrounding the latest defect. TM has been shouldered with fines of nearly $50 million due to its perceived hesitancy in reporting problems it discovers. As a result, the automaker has pledged to be more forthcoming with information.
Some investors may see this latest recall as the last straw. Unfortunately, stock traders looking for a bearish alternative may come up empty-handed aside from shorting the shares. Another breed of investor could see TM as a beaten-down opportunity; after all, the stock is up more than 15% in the past three months. Here too, a strategy aside from “buying the stock” might be desired.
For stock traders who want to expand their horizons into options trading, we have outlined examples of two strategies in TM – one bullish and one bearish. These examples are for educational purposes only, not buy/sell/hold recommendations.
Prices below were taken after Wednesday's close. TM stock was trading at $82.29, down $1.57 on the day.
Bearish Option Strategy: Synthetic Short Stock
Traders concerned that TM can't shake its quality flaws could be tempted to short the shares, but a bearish alternative is creating a “synthetic” short stock by selling a call and buying a put. For example, Toyota bears could buy the March 80 put and sell the March 85 call, paying a net debit of 29 cents per spread. At present, this spread has a delta of -70, meaning it will gain 70 cents for a $1 decline in TM stock and will lose 70 cents for every $1 TM manages to climb.
Moving forward to expiration using our profit/loss calculator,* we can see that gains begin to accrue below the breakeven price of $79.71 (the put strike less the premium paid). Gains will be unlimited down to the zero mark.
Between the strike prices (80 and 85), losses are capped at the 29-cent premium paid for this strategy. Above the 85 strike, however, losses are theoretically unlimited as the stock moves higher. An investor seeing this position move against him would likely close out of it ahead of expiration.
*Investors have access to the profit/loss calculator and other tools as part of a virtual trading account. Use this calculator to illustrate how the profit/loss relationship changes due to movements in the stock price, implied volatility, or other factors.
Bullish Option Strategy: Long Debit Call Spread
Think Toyota's situation isn't so bad? Consider an in-the-money long call spread for a conservative bullish play. The April 75/85 bull call spread (buying the 75 call, selling the 85 call) can be bought for a net debit of $6.11. As can often be the case with call vertical spreads, this is below its current parity value. Parity is $81.11 (the long call plus the premium paid) and the stock is at $82.29.
What does this mean? As long as the stock doesn't fall, the spread will be profitable. Call this a moderately bullish strategy, as the shares aren't even required to rise.
At expiration, breakeven is $81.11, the long call plus the debit paid. Profits are maximized when TM shares are trading above 85. The maximum potential profit is $3.89, or the difference in strike prices less the premium paid. Losses are capped at the premium paid and occur if TM is trading south of 75 when the options expire.
Photo Credit: Beige Alert
The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
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