Positive Ford (F) earnings sparks straddle


Options action during midday trading in Ford Motor Co. (NYSE: F ) suggests investors are looking for volatility to decline during the long term. An investor appears to have boosted options volume due to expire in March by selling the at-the-money (ATM) straddle.

Around 12:06 p.m. EDT, 3,500 F March 13 straddles changed hands for $3.20 per spread. The ATM March 13 calls crossed the tape for $1.60 per contract while the ATM March 13 puts changed hands for the same amount. Both legs were sold as part of a short straddle position betting on a range in the stock during the next several months.

This short straddle position will turn a maximum profit of the credit collected, or a total of $1.12 million, if F shares are trading right at $13 at March 2011 options expiration. The investor gets to retain some but not all of the premium if the stock is trading higher than $9.80 or lower than $16.20 when the options expire. In the event that volatility spikes or if F shares drop below the lower breakeven or soar higher than the upper breakeven price, the investor loses money on this trade. The investor could lose a maximum of $9.80 to the downside or theoretically incur unlimited losses to the upside.

On July 23, F announced earnings of 68 cents per share. This figure beat estimates by a whopping 28 cents. The positive news sent F shares to a recent high of $13.15 on July 23. The stock has since pulled back slightly and was trading around $12.96 as of 1:20 p.m. EDT. Around 11 a.m. EST, UBS raised its target price on F to $17 from $15.

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.

This article appears in: Investing , Options

Referenced Stocks: F

Karla Yeh

Karla Yeh

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