While 100 shares of Ford won’t exactly break the bank at $1,231, there are ways to invest in Ford using options. Depending on the strategy selected, options trades may require a lower capital outlay and can also benefit from the concept of leverage (some options can theoretically yield a potentially higher percentage return than the stock outright).
Two hypothetical options trades (both debit spreads – one bullish, one bearish) are described below. Remember, these are just examples, not recommendations, and be cognizant of your personal risk/reward parameters before executing any new trades.
*Prices given after Tuesday’s close
Bullish Option Strategy: Bull Call Spread
Those investors who side with Cramer and expect long term strength in Ford could buy the January 2011 7.50/14 bull call spread for $4.00 (by buying the 7.50-strike call and simultaneously selling the 14-strike call). The maximum potential profit, achieved if Ford is trading above $14 when these options expire, is $2.50 a 62.5% return on risk – the difference in strike prices minus the premium paid. The maximum loss is 100% of the premium paid, and occurs only of Ford is trading below $7.50 (a drop of roughly 40%).
Breakeven at expiration is $11.50; if Ford is trading anywhere above this level, the spread trade will be profitable. This is a moderately bullish play; in order to be profitable, Ford must simply maintain current levels (rather than move higher). To achieve the maximum potential profit, the stock must gain roughly 14% in the next eight months.
Bearish Option Strategy: Bear Put Spread
Are you a trader that takes the other side of everything Cramer says? Do you think Ford is due for a reversal? Consider buying put spreads. The September 12/18 put spread is currently priced at $4.70 (buying the 18-strike put and simultaneously selling the 12-strike put). If Ford is trading below 12 when September options expire on September 17, the spread buyer can collect the maximum potential gain of $1.30 – the difference in strike prices minus the premium paid (for a 27.6% return on risk). Conversely, if Ford is trading above 18 at September expiration, the maximum potential loss is 100% of the $4.70 premium paid. Breakeven at expiration is $13.30; if Ford is trading anywhere below this level, the spread trade will be profitable. With these spreads and all option positions, traders may opt to exit the trade at any time before expiration (by selling the spreads to close, in these examples).
What’s Your Take on Ford?
Do you still have concerns about the automaker or are you convinced, as Cramer is, that Ford is a good play for the long haul? Would you trade Ford options differently?
Compare OptionsHouse rates for stock options with other brokers. New to options? See how your trade ideas would fare in a virtual trading account before committing any real money.
Photo Credit: John Lloyd
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