Options Trade of the Day: A 'Free' Ford Motor Synthetic Long


Detroit darling Ford Motor Company ( F ) has attracted quite a bit of attention from options traders during the past week, after the automaker missed analysts' fourth-quarter earnings expectations . 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 puts.

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.

F March 14 put and 18 call volume details

The Anatomy of a Ford Motor Synthetic Long Position

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 position.

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 essentially free - excluding any margin requirements or brokerage costs.

F synthetic long details

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 scenario:

F synthetic long profit/loss chart

Implied Volatility

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.

The winter 2011 issue of SENTIMENT magazine is now available here.

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

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This article appears in: Investing , Options

Referenced Stocks: F

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