Ford Motor (NYSE:F) got the week off to a good start, rising almost 5% Monday on the heels of a vote of confidence from Morgan Stanley. The brokerage firm initiated coverage on the automaker with an "overweight" rating and a 12-month price target of $20, which is 55% north of the stock's current level.
The covering analyst argued that Ford is well positioned to enjoy strong sales over the news few reporting periods. He also opined that investors are currently underestimating the company's revenue potential. His estimates for Ford's sales are $115 billion this year and $129 billion next year, with earnings per share expected at $2.60 (above the Street's consensus view of $1.83).
Today's move sent the stock sharply higher, easily outperforming the downtrending broader market. F is now within striking distance of the 13 level, above which it hasn't traded since early April. Technical-analysis fans may have their eye on this strike as it could prove to be support (once it is hurdled) or resistance.
Investors hoping to jump aboard the bullish Ford bandwagon might look into a synthetic long stock, which uses a pair of options to simulate a long stock play. Those who are skeptical of the automaker could consider a straightforward bear put spread. I've outlined this pair of strategies below for educational purposes only. All prices are as of Monday's close, when F shares were at $12.84, up 58 cents (or 4.7%) on the day.
Bullish Option Strategy: Split-Strike Synthetic Long
Feel like you missed the boat in Ford after Monday's jump higher? The split-strike synthetic long offers a similar risk/reward profile as long stock but with limited capital investment at the outset. By shorting the March 12 put and simultaneously going long the March 14 call (both out-of-the-money options), the investor nets a credit of 11 cents per spread. At the outset, this spread has a net delta of roughly 76%, meaning the synthetic position will gain (or lose) 76 cents for every dollar advance (or decline) in Ford shares. All charts below were built using the profit/loss calculator tool in my virtual trading account.
At expiration, if Ford stock is trading between the 12 and 14 levels, gains are capped at this 11-cent credit. Above 14, however, profits are theoretically unlimited. Below the breakeven point of $11.89 (the put strike less the premium collected), the put is in-the-money and the call expires worthless. Losses are similar to long stock, unlimited down to zero because the investor is long 100 deltas below the 12 strike.
Neutral Option Strategy: Bear Put Spread
Bearishly-minded investors could consider a shorter-term spread play with limited reward and limited risk. For example, the November 13/12 put spread can be purchased for a net debit of 38 cents (buying the 13 put, selling the 12 put). If F is below the 12 strike at November expiration, profits are maximized at 62 cents per spread (the difference between strikes less the premium paid).
Above 13, losses are capped at 100% of the debit paid. Return on risk is attractive for this spread at 163%. Breakeven is $12.62; as long as Ford slips below this level by expiration in 46 days, the bearish spread would be profitable.
Please refer to Characteristics and Risks of Standardized Options, copies of which can also be obtained by contacting our Customer Service Department at email@example.com.