Options for stock investors. A better way to trade.

New Trade Alert May 10th – FORD

FORD Tough

New Trade Alert for (F)

Buy Ford January $11.00 Call @$3.00 or less


Risk Rating: 2     (1 = lowest   5 = highest)

Expiration Above Break Even Probability: 49%


FORD Tough

 

FORD stock has been stuck in neutral down 15% in the last two years having a tough time even with ALL TIME RECORD vehicle sales.

 

Analysts are indifferent and the price to earnings ratio stands at 6, YES 6, so low expectation have seen the stock suffer.

 

Recent action has compressed between $13 and $14 for the last two months targeting $15 on an upside breakout.  That modest target is more than a 10% move in the stock.

 

 

 

In the bigger picture F has tracked from $16 to $11 in the last year with the price now at the midpoint pivot.  A technical wedge has formed with lower highs and higher lows that coincidentally converge at the $13.50 level a well with the bigger breakout target at $18.

 

With the $13 support right below… the reward to risk equation favors the BULLS at these levels.

 

This is an opportunity to use the power of options for a capital preserving stock substitution strategy.

 

The January option has eight plus months for Bullish development.

 

The actual shares are inexpensive compared to some other stocks but long-term money potentially tied up in the stock play could be put to better use.  An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.

 

The Options Way: Unlimited Upside Potential with Limited Risk.

A Ford long call option can provide the staying power in a potential larger trend extension.  More importantly, the maximum risk is the premium paid.

 

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.  

There are two rules options traders need to follow to be successful.

Rule One Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.   It is also important to buy options that payoff from only a modest price move.

 

There is no need to ONLY make money on the all but infrequent long shot price explosions.

 

Good Options can profit from only modest directional moves.

Any trade has a fifty/fifty chance of success.  Buying In The Money options increase that probability.  That Delta also approximates the odds that the option will be In The  Money at expiration.

 

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With Ford trading at $13.45, for example, an In The Money $13 strike option currently has $2.45 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop.  Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

 

Trade Setup: I recommend the January FORD $11 Call at $3.00 or less.

 

A close in the stock below $11 on a weekly basis or the loss of half of the option premium would trigger an exit.

 

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

 

The option also behaves much like the underlying stock with a much less money tied up in the investment.   The Delta of this $11 strike is 85%.

 

The January option has nearly nine months for bullish development with the right to buy at nearly the lowest level in the last year.
 
The maximum loss is limited to the $300 or less paid per option contract. The upside, on the other hand, is unlimited.

 

The FORD option trade break even is $14.00 at expiration ($11 strike plus $3.00 or less option premium). That is just 50 cents above F’s current price.

 

A push above $15 targets $18 which would put the option value at $7.00 to more than double the investment.

Leave a Reply

Your email address will not be published.