Ford Motor F has seen options volume and volatility ramp higher this week in anticipation of today's General Motors IPO. According to our volatility charts, 30-day implied volatility has increased in Ford over the past week from 39% to 52%, hitting its highest point since early July. This compares to 30-day historical volatility of 33%. The increasing trend suggests F options are in greater demand, and are therefore getting more expensive.
Roughly 810,000 Ford options traded on Monday (2.3 calls for every put) and about 730,000 traded on Tuesday (1.5 calls for each put). This compares, for example, to October's average daily option volume of 125,000 contracts.
While there has been a wide range of activity across many strike prices in recent days, one trade we'd like to focus on is a long straddle that traded Wednesday at the March 17 strike. It appears as though blocks of 4,000 options were purchased on both the March 17 call and put for $1.61 and $1.83, respectively, or a total straddle price of $3.44 apiece. This is the at-the-money straddle and is roughly 20% of the strike price. Total premium for the 4,000 lot was nearly $1.38 million.
At the time of the trade, the call had slightly higher delta (despite being out-of-the-money) so it appears as though the investor simultaneously shorted stock (28,000 shares or so at $16.82) to offset this imbalance on the call side. The fundamental principle behind the long straddle remains; the trade will be profitable if the shares rally or decline. Maximum loss occurs at expiration if Ford is trading right at the strike price.
If the investor buys to close the shares, leaving only the long straddle open, breakeven at expiration is $13.56 to the downside and $20.44 to the upside (the straddle strike less and plus the premium paid). Anywhere between these levels, the trade will lose money. Either way, the investor in question is looking for a sharp move in Ford between now and mid-March but isn't sure of the direction.
Of course the long straddle owner could exit the trade anytime before expiration, if the implied volatility rises in these Ford options, increasing the time value of the options. The sensitivity to vol changes from this trade equals the VEGA of both the call and the put. That is 0.074 today, or just under $30,000 of risk per vol point.
Not to be outshined on the news front this week, Ford made an announcement of its own, revealing the markets that will debut the Focus Electric. The venerable automaker's first all-electric passenger car will retail in Atlanta, Boston, Chicago, L.A., San Francisco, New York, Seattle, Washington D.C., and a number of other large metropolitan areas.
Photo Credit: exfordy
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