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.