Put Selling The Ford Stock Fall – Dec 18 2013

The news from Ford Motor Company that they expect their profit next year to drop as much as $1.5 billion sent their shares plunging today. Ford indicated that it would be difficult to reach their price targets for 2014, especially in North America where the majority of their profit comes from. As well the company is introducing almost two dozen new vehicle designs in 2014 which will impact their earnings. Last they announced they will probably have to offer discounts to move enough vehicles in 2014 which will also impact revenue and earnings.

During the day today with volume up more than 5 times normal a lot of analysts who follow Ford referred to the selling as a panic. I received a lot of emails from investors today, wondering if this was an opportunity for Put Selling. Let’s take a look.

Ford Stock Support Levels

For 2013 there have been two strong support levels in Ford Stock. The first is at the $13 range which Ford traded in for the first 5 months of the year. A lot of investors have bought stock in that price range. If Ford stock should fall that low again, it could bring in a lot of selling from nervous investors. The second level is all the way up to $16 and it was broken decisively today. The stock over the next day or two may try to rebound and recapture that level. Overall though today’s action looked pretty decisive. Today’s action could mean a new trading pattern could emerge for 2014. It’s tough to call at this time but we could see a test of support at $13 sometime in early 2014 when revenue starts to be reported and shows a marked decline.

Put Strikes

The obvious choice for the first put strike to consider selling is the $15. Again this is not a trade I would enter. However the $15 at over 2% return for a month is intriguing. With the stock pushed lower today, it failed to break the $15 strike reaching $15.17 as an intraday low. Should puts be sold at $15 and Ford stock fall that low, it would seem to be a simple strategy to roll down to $14 and add additional put contracts to keep the roll down profitable. This is why if I was doing this trade I would start with a smaller number of puts at the $15 strike and then if I had to roll I could easily add more put contracts to keep any roll down profitable but still reasonably short. Anything longer than 6 months for Ford stock put options seems excessive. I would prefer adding more capital and staying closer in a roll down than going further out in time but not adding in additional capital.

Ford Stock Short-Term Outlook

Looking at the past two months in Ford Stock, momentum was already declining from the start of November. There was a very short period of positive momentum readings but since the start of November momentum has been negative most of the time. Today of course, the reading is very negative. Volume was incredibly high today but still not the highest day this year. That happened in January 2013. The decline in the stock, pushed it outside of the Lower Bollinger Band and closed with a long red candlestick but the price closed off the lows for the day.

The last indicator is the Slow Stochastic which at the end of the day was actually neutral rather than pointing up or down for the stock.

Put Selling Ford Stock Successfully Needs Confidence

While the news from Ford is poor, the put premiums were not. The Jan 18 2014 options expiry $15 put contract traded as high as .38 cents on Dec 18 for a return of 2.5% and the $14 put strike was as high as .16 cents for 1% return. Personally I do not think the put premium dollar amounts warrant risking capital but then I do not like automotive stocks in general. However to sell puts against Ford, especially following their announcement today, needs confidence.

Investors selling puts must have confidence in the put strikes being sold and in their ability to repair their trades should the stock fall lower. Between $16 and $13 valuations there are only small pockets of support. This means the stock could easily fall lower.

However after a day such as today where the stock was down over 7%, it makes sense to watch the stock over the next day or two and see if there is a bounce back. A bounce back means that investors have faith that the company will still manage to turn out a decent revenue and profit report for 2014. A drop in revenue of $1.5 billion is not the end of the world for Ford. They have had excellent years since 2009 and despite a drop of $1.5 billion, this company is very viable.

Put Selling Ford Stock Summary

My opinion is immaterial on Ford Stock. I have no interest in owning shares or selling Ford Stock options. For those that do, the best way would be to establish a clear goal and have in place a strategy to protect those positions in the event the stock falls back to $13. At $13.00 there is a strong possibility the stock will bounce, but if it breaks $13.00 and heads lower volume could be heavy as other investors who have been in for a longer period of time, decide to get out.

About all I would add is that there are many stocks which investors can trade in. There are literally thousands. When a trade changes and a stock is more difficult to judge, often it is better to step aside and trade a different stock. In that kind of instance I tend to remove that stock from trading and return it to my watch list. Then when the stock seems more stable or is preparing for a bounce I return to trading the stock.

Right now I think Ford needs to establish a clear stable trading bottom. Only then will Ford Stock be worthy of selling puts against it.

Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. Trade at your own risk. Stocks, options and investing are risky and can result in considerable losses. None of the strategies, stocks or information discussed and presented are financial or trading advice or recommendations. Everything presented and discussed are the author’s own trade ideas and opinions which the author may or may not enter into. The author assumes no liability for topics, ideas, errors, omissions, content and external links and trades done or not done. The author may or may not enter the trades mentioned. Some positions in mentioned stocks may already be held or are being adjusted.