Options Update: Call Speculators Flood Ford Motor Company

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The shares of Ford Motor Company ( F ) have followed the broader equities market higher today, despite a dip in month-over-month and year-over-year sales in August. Furthermore, the automaker said its market share grew for the 22nd month in 23, with the company touting demand for its "high-quality, fuel-efficient" vehicles. "Ford continues to outperform the overall industry," noted U.S. sales executive Ken Czubay.

Options speculators have also responded to Ford's latest figures, especially on the call side of the tape. So far today, the stock has seen roughly 104,000 calls change hands - more than twice its predicted single-session volume of about 49,000 calls. On the flip side, F has seen around 28,000 puts cross the tape, practically on par with its expected daily volume of 25,000 puts.

F September OI Garnering the most attention has been the near-the-money September 12 call, which has seen about 19,000 contracts traded so far - most of which have traded at the ask price, suggesting they were bought. However, with more than 177,100 calls already docked at the front-month strike, we can't yet tell how much of today's volume will translate into freshly purchased bullish bets.

Digging deeper into today's options action, it appears one speculator may be employing options to simulate a short stock position on F. Earlier today, a block of 1,120 December 11 puts changed hands at the ask price of $0.84, suggesting they were bought. At the same time, a symmetrical block of December 12 calls crossed the tape for the bid price of $0.82, implying they were likely sold.

Assuming both blocks - each marked "spread" - consisted of new positions, we could be looking at a less aggressive version of the synthetic short stock strategy , which is constructed by buying puts and selling an equal amount of higher-strike calls with the same expiration.

Since the investor paid $0.84 for each December 11 put and received $0.82 for each December 12 call, the net debit on the play stands at only $0.02 per pair of options - a relatively scant entry fee compared to what it would cost to simply short hundreds of F shares. Nevertheless, the options speculator - like the short seller - will make money if the shares of F retreat in the near term.

More specifically, the strategist's profit will increase the further F declines beneath the $10.98 level (put strike minus net debit), as the puts would move deeper into the money and the calls would remain worthless. Meanwhile, the investor's maximum loss is limited to the $0.02 paid to establish the trade, should the shares of F remain pinned between the $11 and $12 levels through expiration.

On the other hand, the trader's losses could become quite steep if F rallies significantly north of the $12 level by December options expiration, as his puts would expire worthless and he would have to repurchase the sold 12-strike calls.

Technically speaking, the shares of F have skyrocketed more than 55% during the past year. The stock recently tested support in the round-number $10 neighborhood, and could be on its way to challenge resistance in the $13-$14 region, which has acted as a roadblock for the equity in 2010.

Monthly chart of F since July 2009

However, despite the stock outperforming the broader S&P 500 Index (SPX) by about 8% during the past 40 sessions, analysts and short sellers remain wary of F.

According to Zacks , more than half of the 12 analysts covering the security consider it a "hold" or worse. Meanwhile, short interest on the equity surged 5.7% during the past month, and now accounts for nearly 287 million F shares, or 9.4% of the stock's total available float. In fact, at the car concern's average pace of trading, it would take about a week for all of these bearish bets to unwind.

From a contrarian standpoint, though, Ford's solid fundamental and technical set-ups - juxtaposed with the pessimism still plaguing the stock - could point to a bullish opportunity. As the shares of F continue their rebound off round-number support, a wave of upbeat analyst attention or a short-squeeze situation could fuel additional gains for the security - which wouldn't bode well for that aforementioned options strategist.

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This article appears in: Investing , Options

Referenced Stocks: F

Schaeffer's Investment Research

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