How Large Ford Option Traders Are Reacting To Disappointing Earnings

Ford Motor Company F shares dropped 6.8% on Thursday after the company reported weak demand in China and lowered its year-end guidance numbers. As Ford continues with its $11 billion restructuring plan, the market seems concerned about the stock’s near-term outlook following a credit downgrade to junk status by Moody’s last month.

Despite the price weakness, some large options traders are making some big bets on Ford following the company’s earnings report.

The Trades

On Thursday, Benzinga Pro subscribers received dozens of option alerts related to unusually large trades of Ford. Here are three of the largest:

• At 9:51 a.m., a trader sold 49,832 Ford call options with a $10 strike price expiring on Jan. 17, 2020 at the bid price of 10.1 cents. The trade represented an $503,303 bearish bet.
• At 10:02 a.m., a trader bought 522 Ford put options with a $15 strike price expiring in January 2021 at the ask price of $6.55. The trade represented an $341,910 bearish bet.
• At 10:23 a.m., a trader sold 1,463 Ford put options with a $15 strike price expiring in January 2021 near the bid price at $6.602. The trade represented an $965,872 bullish bet.

Benzinga Pro reported 20 unusually large Ford option trades on Thursday morning. Of the large trades, six were calls purchased at or near the ask or puts sold at or near the bid, trades typically considered bullish. There were also 12 large orders of calls sold at or near the bid and puts purchased at or near the ask, trades typically considered bearish.

See Also: How To Read And Trade An Options Alert

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the large number of large Ford option trades, it’s likely at least some of them represent institutional hedging.

Guidance Signaling Tough Road Ahead?

Rising warranty costs and incentive spending coupled with slumping demand in China as the trade war drags on were the major contributors to Ford’s weak guidance. Net income was down 57% compared to a year ago as Ford’s costly restructuring plan eats into profits.

Ford management said on the earnings call the company is laying the foundation for a business model that can be successful in the long term, but the large number of large bearish option trades suggest investors remain skeptical.

Benzinga’s Take

Cuts to 2019 guidance certainly drove some of bearish activity in near-dated contracts. However, a silver lining for Ford bulls is that the largest trade of the morning appears to be a January 2021 put holder cashing out of a position. The trade had a break-even price of $8.40, suggesting the trader doesn’t see much more long-term downside from Thursday’s $8.60 level over the next 15 months.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.