Call action in Ford (F) suggests moderate bullishness

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Just like the rest of the market, the past three months have not been kind to shares of Ford Motor Co. (NYSE: F ). But in the last week, the stock has gotten up off the mat, and rallied more than 8% from sub $10 to around $10.80 today. This morning, we saw some large call volume that suggests a bet that further rallies lie ahead for the shares.

Between 10:43 a.m. EST and 11:42 a.m. EST, 150,000 September 12 calls traded for an average price of 41 cents. This was an investor purchasing these options, but that is not the whole story. At the same time, we see that 75,000 contracts traded in both the September 14-strike and 15-strike calls. The September 14 calls traded for 10 cents per contract, and the 15 strike for five cents per contract. All of this action translates to two bull call spreads. The investor bought 75,000 of the September 12-15 bull call spreads for 38 cents, and bought 75,000 of the September 12-14 bear call spreads for 33 cents.

You can see from the graph below that the trade really just looks like 150,000 bull call spreads. The investor paid out $5,100,000 in premium. So no matter what, they need shares of F to rally to make money. If they hold the spreads until September expiration, then they need F shares to be above $12.38 to get back all of the premium that they have laid out. Given that the shares closed at $12.42 as recently as May 13, a rally of 15% from here may not seem unreasonable given that it is just getting back recent losses.

Another possibility to consider with this trade is that the investor is rolling down a long call position. Looking at the open interest of the September 12 calls, we see that it is 48,198. The call purchase clearly occurred to open. But in the September 14 calls, we see open interest of 180,426. So, it is possible that the investor sold half of their September 14 calls to close, and sold the other half in the form of the September 15 calls, and then bought the 12 calls. Either way, the net effect of today's call volume is to put buying pressure in the shares. Whether this is a roll or an opening call spread purchase, the net delta calls for market makers to buy roughly 3.6 million shares of stock to hedge the trade.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Options

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Jud Pyle

Jud Pyle

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