Detroit darling Ford Motor Company (
) has attracted quite a bit of attention from options traders
during the past week, after the automaker
missed analysts' fourth-quarter earnings
. F has even made several appearances in recent
Trading Floor Blog call skews listings
, which compare buy-to-open call volume with buy-to-open put volume
on the International Securities Exchange (ISE). This preference for
F calls appears to have carried over into today's trading, as more
than 195,600 contracts have traded, compared to just 76,300
While the most active contract on the session has been the
February 17 call, sporting volume of 31,164 contracts, I found the
activity on the March 18 call to be much more interesting.
Specifically, 10,000 March 18 calls traded at 9:35 a.m. on the
International Securities Exchange (ISE) for the ask price of $0.15,
or $15 per contract. This block was marked "spread."
After a bit of digging, I found the other half of this trade on
the March 14 put, where 10,000 contracts traded at the same time on
the ISE for the bid price of $0.15, or $15 per contract. Given this
data, it would appear that we are looking at a synthetic long
position on Ford Motor.
The Anatomy of a Ford Motor Synthetic Long
Before we get into the particulars, a synthetic long options
trade attempts to replicate, as closely as possible, a long stock
position. The trader typically buys at-the-money calls and sells
at-the-money puts in equal numbers at the same strike with the same
expiration date. By using options, the trader gains considerable
leverage, allowing for greater returns on the position than those
achieved by investing the same amount of money in a stock
Overall, the trader paid $0.15, or $15 per contract, for the
10,000 March 18 calls, and received a credit of $0.15, or $15 per
contract, for selling 10,000 March 14 puts. As such, this synthetic
long position on F is
- excluding any margin requirements or brokerage costs.
The maximum profit on this trade is theoretically unlimited,
since there is no cap to how high F shares can rally. However, the
trader does need F to rally above the $18 level -- about 16% from
its current trading range near $15.52 -- before this position will
realize a profit.
The maximum loss, meanwhile, is limited to the strike price of
the sold March 14 put, or $14. Coincidentally, breakeven is also
equal to the strike price of the sold March 14 put. Below is a
chart for a rough visual representation of the trade's profit/loss
Rising implied volatility is pretty neutral for a synthetic long
trade. Specifically, it lifts the value of both the purchased and
the sold options, thus increasing the cost to buy back the sold put
and boosting the premium received when selling the purchased call.
At the time the position was entered, implied volatility for the F
March 18 call was 34.44%, while implieds for the March 14 put were
34.67%. For comparison, F's two-month historical volatility arrived
at 13.59% as of the close of trading on Tuesday.
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