Ford Option Swap

by JT McGee

Ewww!

These Ford options are throwing me for a loop. Set to expire in January 2013, and placed at the $10 strike, the bid fell back to my entry price of $1.95. Yesterday I decided to go longer, and have completed my move. I’ve swapped my 2013 calls for January 2014s. I’ve also moved to two different strike prices, both of which are out of the money.

The trade does allow me to double down with twice the position. I purchased the January 2014s with strikes of $12 and $17, while keeping the total outlay at the same amount. Moving up from the $10 strike obviously increases the risk of loss; however, it also gives me an additional year to wait out the trade.

Upgrade!

Bond upgrades are not coming as fast as I thought, though Fitch became the first agency to move Ford up to investment grade. Also, the credit markets were surprisingly responsive to the upgrade, as credit default swaps on Ford’s debt fell 40 basis points in today’s trading. Declining long-run cost of debt service only increase the fair market value for the company.

Where the Upgrade Pays Off

Ford recently amended its terms on a credit agreement for short-term capital through a revolving credit facility with a $9 billion line. While the company has only $180 million drawn on the facility, the terms state that the collateral securing the facility and limitations on debt prepayments and dividends to shareholders will be removed upon a second investment grade rating from one of the three major agencies. Fitch is number one, Moody’s or S&P will have to be the second.

Ford essentially signed its life away when in 2006 it pledged virtually every asset available for funding worth $23 billion. It’s one more upgrade away from freeing up that collateral to use for cheaper financing. One more upgrade also enables it more freedom in making prepayments on obligations, and distributing cash to shareholders in the form of dividends and buybacks. Fitch did note that shareholder friendly decisions that burn cash could negatively affect the company’s rating, but I’m going to call Fitch’s bluff and say that they’re full of it – especially if another agency steps up to go investment grade.

Recent sales data for its cars was…well, good enough! Five percent year-over-year growth may appear modest, but there’s very little real growth priced into the company at the present time. Higher gas prices haven’t affected its sales of trucks, which are a key part of its sales mix. Also, the Focus rocked a 65% sales gain compared to the same period a year ago – the company had supply issues that negatively affected Focus sales last year.

In a perfect world, Ford shares would rise to $20-25 per share by 2014, which is what I determine to be a fair value for the company today. A move to $20 per share would give me a return of roughly 500% on the $17 strikes, and 433% on the $12 strikes.

Of course, Ford has to close above $14 per share by January 2014 to breakeven, which is a 22.8% move. That’s a big hill to climb, but we have plenty of time. Conveniently, a 22% move would essentially cover my discount rate I used in my model.

Moving Out Another Year

One additional year before expiration allows for some clearance over a couple obstacles:

  1. Debt upgrades – Hurry up! Either way, any upgrade takes time to affect the fundamentals of a company, but upgrades always excite Wall Street.
  2. Industry mix – Toyota and Honda are both back to doing business after the Japanese earthquake and tsnunami. Pent up demand for these two automakers, which have incredible brand loyalty, will likely affect Ford’s supposed market share in the short-run.
  3. Wall Street – The terrible thing about Wall Street is that being right is contingent on other people agreeing with you. Ford really is, in my view, one of the most underrated bargains on the market.

Catalysts: More institutional demand as dividend puts mutual funds on the radar; increased pace for housing starts, which is good for construction demand; improved employment, which justifies a car purchase; higher gas prices, which gets people to the car lot; and pent-up demand as American cars are now the oldest ever at 10.8 years on average.

Game plan: Hold until expiration in 2014, or until my own greed subsides at $20 per share. Alternatively, put my life savings into long-dated calls if Ford stock drops to $9 per share. (I’m kidding, but not really.)

I’ll keep logging this play as time goes on, since it was a position I openly announced on the blog.

{ 31 comments… read them below or add one }

PK April 25, 2012 at 00:06

January 2014, F (Volume .5% daily…something funky with the puts, but calls worked):

Call High (75%) 12.157
Mid 10.461
Low (25%) 8.926

May 2012
High 11.736
Mid 11.074
Low 10.446

Enjoy!

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JT McGee April 25, 2012 at 08:09

Get’cho black magic out of here!

Expectations for Ford are not all that great. Too many people are selling at $13, for whatever reason. I’ll be interested to see what the institutional and mutual fund shareholders did in the first quarter of the year.

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Rob April 29, 2012 at 02:08

I’ve noticed the same thing…glass ceiling at $13. I’m an owner of a good amount of shares around $14. Performed more or less the same analysis as you and hence the reason I bought in the idea that F was undervalued and could certainly take off to $20. Now stuck in a waiting game for the time being. How do you see things playing out over the next year. On a side note, I’m glad F beat, even though profits were down, but I’d say a lot of that is attributable to the lack of tax benefit that F saw over the past couple of years.

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JT McGee April 29, 2012 at 12:17

I see things playing out very well regardless of Europe, which tends to be the macro scene that everyone fears.

Here’s where I’m focusing my attention:

1) North American production – Ford will bring 400,000 units of additional supply to the North American market in 2Q-3Q 2012. This has also strained earnings as it requires large capital expenditures and other charges. However, as North America remains the strongest market, additional supply should greatly increase Ford’s automotive margin in this market – the most profitable one.

2) Leases – Don’t discount Ford Credit in the earnings. From the conference call, Ford Credit will pay a cash dividend to Ford Motor this year equal to an amount between $500 million and $1 billion. Do note that Ford Credit’s earnings are NOT just the net interest margin between borrowing costs and financing terms. The company makes killer money on reselling program and lease cars. As used car prices have trended higher, these profits are larger. Note, though, that most leases are 2-4 years (let’s say an average of 3 years) and doing the math…Ford isn’t selling nearly as lease cars this year as it had in years past. The year 2009 was the worst year for automotive sales and leases. Each year after shows an upward slope, so lease revenues will be down this year, and up considerably from 2013 onward.

3) Upgrade – I modeled Ford’s potential benefit to be anywhere from 50-100bps across the whole capital structure on a debt upgrade. Take a look specifically at Johnson Control’s cost of debt – they pay a rate 200 bps less than Ford for 5-year cash. Given that the bulk of Ford’s debt can be financed reasonably at a maturity of 5 years (financing for buyers), an upgrade is hugely valuable. Ford’s capital structure isn’t nearly as bad as people seem to think; most of the debt is in its financing arm, which is wildly profitable. It would be even more profitable if Ford could drop its short-term cost of capital by 200bp. With $80+ billion in debt, a 50-200bp is worth $400 million – $1.6 billion pre-tax on a run rate.

Toyota’s bonds with 20 years to maturity offer a YTM of 5.92% compared to Ford’s 7.76%. That’s 184bp of spread. Gross. Shrink that spread and Ford can better compete on incentives while substantially increasing its net interest margin on financing.

And – yeah, I was very happy with Ford’s results. There is, unfortunately, a lot of retail money in Ford stock – a lot of people are buying and selling on the headlines. A survey of the balance sheet, cash flow statement, and the trends in the automotive market make this one of the better plays for true value investors.

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Robe May 12, 2012 at 08:49

Do you ever check out F from a purely technical stand point as well? I do the best I can…although I’m not quite sold on whether technicals really apply to equities the way they do with commodities. In any event, I first noted the descending flag/pennant pattern between the end of January and end of March, before the price fell off a cliff and that pattern fell apart with it. Now, it seems as though F is looking for a triple bottom (1st bottom being in late September, second in late October)…hopefully, the price bottoms out at around $10 and then the supply is overcome by the demand. Obviously, the big factor in all of this is whether it can get past the resistance at $13.

I do believe that for the time being, F is a day trader’s stock. Given the huge uncertainty in Europe, as well as the slowdown in China near term, investors/traders are looking for any excuse to bring the share price down. I also note that the trading of GM and F go hand-in-hand…arbitrage? You bet…I wonder when they will decouple from each other and trade their own ‘book.’

The last issue of note is forward P/E. Traditionally (correct me if I’m wrong), automakers have traded around 13-15 P/E. That said, it so seems that F is grossly undervalued at current price level with its P/E at around 7. An uptick to traditional levels would suggest a revised stock price in the upper teens.

One final thought…do you see an upgrade from S/P or Moody’s in our near future? What about a divy bump? While I got into this stock for growth and not the divy, it’s nice to get paid (even a little) while we wait this thing out…

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JT McGee May 12, 2012 at 11:03

I don’t look at the technicals – I go on pure business valuation. My bias is pretty simple: I think technical analysis is mostly a self-fulfilling prophecy. That said, I do think some technical analysis has value – you mention that there appears to be resistance at $13. I have no doubt that someone is selling heavy in that area, so yeah…I can see that. Long-term, though, I just don’t see where technical analysis really matters. Just want to make that clear so that you can understand where my perspective comes from.

I’ve only heard a few say multiples in the 13-15 range. I think 10 would be way more reasonable, and I like to play it safe. So there’s a good 50% upside based on that figure. Using my discounted cash flow analysis with a 12% discount rate, I give it a value of $20-25, with $21 being what I consider my most accurate numbers. Obviously auto margin is VERY important to my DCF. Also, the dividends paid by Ford Credit to Ford Motor are also important to DCF due to the time value. And can’t forget about capex, though most capex is already on the books for the company’s latest expansion plans.

I don’t see a dividend bump. More likely, I would expect share buybacks given the low valuation. Additionally, I think the automakers as a whole are very, very cautious and an increased dividend would have to be sustained to maintain confidence whereas buybacks would not. I think Ford’s dividend of roughly 2% per year is very good given the cyclical nature of the industry. It meets the cost of carrying a stock with leverage, and is nearly equal to the 10-year bond yield. So, for now, it’s high enough given Ford’s heavy operational/financial leverage.

The upgrade is certainty. It’s all about when. Ford sold 3-year bonds at par with a yield of 2.75%, 112.5bp lower than bonds issued with the same maturity in October. Granted, there was more European risk priced into the market in October, but even still, a savings of 112bp is incredible. Across the curve, that amounts to a savings of $900 million on a run rate. (I think Ford bonds are one of the best places to put cash if you want yields higher than money market accounts/bank accounts.)

Also, as this article from Fox Business says “The risk premium, or spread, on Ford 7% coupon bonds due 2015 was recently just 2.38 percentage points, down from 3.99 a month ago, according to MarketAxess”

It goes on to say “Ford last issued debt in late January, when it sold $1 billion of 4.25% coupon five-year notes. They were priced at 3.54 percentage points over Treasurys, but last traded Monday at a spread of 2.36 points, MarketAxess shows.”

Upgrade is starting to get priced in. I think we’ll see it by the end of the year. There’s no reason Ford should be denied an upgrade at this point. It has sufficient cash on hand, improving trends in the industry, improved products, and an obscenely profitable credit arm. Heh, speaking of self-fulfilling prophecies, rapidly declining cost of debt service obviously improves cash flows to the firm, which puts it in a better position for an upgrade.

I REALLY like how Ford is passing up some customers if it means easing up on risk. I would actually prefer Ford to grow slower than the other automakers, so as to keep a better margin of safety. Pent-up demand is very real; Ford’s numbers are spectacular. The whole industry, especially highly-levered Ford, needs to make sure that it doesn’t overshoot on production and drive down margins. Given Ford’s financial and operational leverage, I don’t mind the slow-growth path that Mulally has in place. I love it, actually.

Disclosure: Still holding F calls expiring in January 2014.

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JT McGee May 12, 2012 at 11:21

I’ll be a happier camper when the retail money gets out. A total of 55% of the float owned by institutional investors is too small to stop the irrationality of retail cash in the equity markets. There are many great retail investors – no doubt about that – but there are far too many who go into equities thinking they’ll be in for the long-term only to sell a great security after 5% upside or to protect themselves from a 2% loss.

So, the day traders can have their fun. In the long haul, markets will find equilibrium, and I think the fair value for Ford is far higher than $11 per share.

Rob May 12, 2012 at 12:50

Well, I am definitely hoping this is the case…if you don’t mind me asking, what calls are you holding? Do you have non-call investments in F as well? I agree that the retails are really screwing with the stock price, but what gets me is, why does F not react to good news and move up (according to its beta it should) the way it moves down on a bad day? Doesn’t make a whole lot of sense. I agree with you re: Mulally’s growth plan…one major reason I invested in the stock was because of his One Ford plan. Specifically, the fact that F is not chasing market share as much as it once did. Or offer the kinds of incentives that it once did to compete with the other automakers.

I’ve thought about cost dollar averaging my position but at this point, I’d rather stand pat to see how everything shakes out, especially with the European uncertainty all around us. Like I said, I’m an owner around $14, which isn’t dreadful – I really didnt expect such a huge retracement from the high of $19. I can’t imagine you did, either. In any event, I see good things in F’s future, including investment grade, which I think will happen well before the year-end. Based on 2/3 rating agencies upnotching F, I am confident we will see the 55% institutional investor number jump and begin crowding out the retailers. I enjoy talking about investments, especially this one…very interesting on many different levels

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JT McGee May 12, 2012 at 13:42

I moved from the $10 strike expiring in January 2013 to $12 and $17 strikes expiring in January 2014. It allowed for an extra year for Wall Street to agree with me. Breakeven is at $14 per share by January 2014, so there’s a long way to run. Total return would be about 400% if Ford goes to $20 per share. I guess we’re in the same boat as far as our breakeven point, though I have decay and no dividends working against me.

I don’t hold anything other than calls because it doesn’t meet my criteria for margin of safety. Usually I look for a 50% discount to DCF value using a 15% discount rate. I also wanted more upside potential, as I see this as a firm that should move with momentum when it does. That’s consistent with your mention of a high beta + high operating leverage. I’ll be honest: I don’t mind the downside protection, either. I really think I can rule that out, but you never know which way the winds will blow on any given day.

I bought options first in October, during the worst of the European slump. At one point I had more than doubled my money, but I got greedy. Time value eroded most of that value to date, and it wasn’t until recently I rolled into a position with twice as many lots at higher strikes to expire in January 2014 at the same cost basis. I’m holding onto a loss right now of roughly 25%.

Ford wasn’t ever really on my radar until the European dive. Went on a shopping spree for a few other stocks then, and pretty glad I did. Ford’s the only one that hasn’t moved since! Irritating to say the least – especially since it was the only one (at that particular time) that I decided to go in with options.

I don’t venture into the world of large caps very often. From my perspective, the broad market is fairly-valued. So it will take a secular bull market in autos for Ford to start moving. I usually stick to micro and small cap stocks, which are more likely to move independently of the market as they aren’t affected by general in and outflows. I like net-nets as well companies with high FCF yields with an extra cyclical kicker. Those with strategic attributes poised for a buyout are my specialty. Ford obviously doesn’t fit that mold…no one is going to buy it out as a private owner. It’s a unique one in my portfolio, but the numbers were all too convincing.

I’ll hang onto this for the long-haul. The way I look at it is that each year it doesn’t move it becomes only more and more undervalued. Using a 12% discount rate, the $20 target becomes $22.40 then $25 and then $28, etc. with each passing year. I’m definitely not building in a lot of growth into my model, either.

As for why Ford won’t respond to improvements…heh, your guess is as good as mine! I too enjoy investing…it’s like kicking a field goal where the goal posts move back and forth. There are so many moving parts to an investment that it’s hard not to find intellectual enjoyment from it, nevermind the monetary benefit. I live for it. Sometimes it’ll make you want to pull your hair out – like when Ford goes every which way despite improvements – but I find it fun 99.5% of the time.

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Rob May 13, 2012 at 07:24

Well, I hope for both of our sakes that this thing starts moving in the opposite direction soon…seems quite oversold these days, but if the market remains jittery due to happenings in Europe, I fully expect things to continue heading in the wrong direction. I’ve actually thought about adding to my current position, but think it may be a good idea to wait it out and see where things settle. Too much uncertainty for the time being.

Very curious to see how things pan out this summer…things seem to be busy in the F shop with the typical 2-week idle period slashed to only 1 week. Further, the company cannot even keep up with the demand! That to me is a very bullish sign, as long as they return their margins and Asia does not severely slow down. I read many articles on the company, especially the ones on Yahoo finance…not really sure what to think of some of these authors, whether they be Seeking Alpha or Motley Fool. I’ve even seen some authors completely reverse their outlook on F, which gives you a good indication that you should only take what anyone says with a boulder sized grain of salt. They do make for interesting reads, however.

What are your thoughts on the arbitrage game that some of these HF are playing between F and GM? Seems that there is a concerted attempt to keep the 2 companies locked into a 2:1 ratio; take now for example – F is at 10.60, whereas GM is at 22. Interesting thought and I wonder if the games will cease if and when the government finallt dumps its ownership of GM…

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JT McGee May 13, 2012 at 10:32

I’m going to add below $10 per share, because the valuation really is stupid. I don’t have any other way to put it, really – it’ll be absurd if Ford falls below $10 per share. (Edit: I’ll probably buy the equity, not options. I might go so far to make it a core holding worth 10-15% of my portfolio. I tend to hold less than 8 stocks at one time, sometimes putting half the portfolio in a single stock. Stupid? Maybe, but I’d rather invest the bulk of my cash in a few great opportunities than a bunch of okay opportunities.)

Ford can’t keep up with demand, which I too believe to be a great sign. It’s also a sign that Ford isn’t going to build out to big for marketshare only to throw away margins. I’d much rather see fewer Ford cars on the road than to see operating losses and new, significant risks to the business.

Do what’s good for your portfolio and avoid SA/Fool like the plague. I wrote about when to buy dividend stocks but went off on a tangent about Fool’s reporting. Under the 3rd bullet, I linked to a Fool author who never read the 10-K/10-Qs nor attended a conference call only to conjure up a grand conspiracy about the actions of a particular company to cut dividends and buy back shares. It’s ridiculous how incorrect his piece was, but that’s par for the course at Seeking Alpha and Fool. There are far too many people writing about individual equities without even doing the most basic of research on the fundamentals of a company. And don’t even get me started on StockTwits…heh, one person berated Ford for having a low return on assets. Duh? By assets, it’s basically a bank! No banks have high returns on assets – it’s all about leverage and net interest margin. That’s Finance 101, if not Finance 50. No one should buy any stock with that limited understanding of a business model. To share your view having that little information only makes it worse.

There’s definitely some correlation in the GM/Ford business models and environment, so it seems natural that they would be tethered together in the short run. You bring up a good point with the government’s ownership stake in GM. I would suspect that GM will take a dive when the government’s stake becomes part of the float. Long-term, I think Ford is a much better buy than GM. I don’t trust GM’s leadership as much as I respect Mulally. Plus, I really like the “no nonsense; no BS” style of Ford’s management all around. GM may have a much better balance sheet, but the company has risks (particularly in emerging markets) that I don’t necessarily like. I’m not a growth story investor; I don’t care about growth as far as my analyses. I like highly-leveraged companies that play it safe and do the same thing year after year. I just don’t get that vibe from GM. I think Ford has a better line-up of autos, too. The common platform plan with Ford is obvious, but for car companies, genius. That’s the no nonsense stuff I love. Smart and conservative decisions in a highly-cyclical business will be rewarded when other investors wake up to the opportunity. For now, we wait!

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Rob May 13, 2012 at 11:41

I completely agree with your assessment of F’s line up. I sincerely believe that it is unparalleled in the auto industry. I also like the fact that the company is focusing on a core line up as opposed to throwing out complete garbage like it did back in the ’90s…clearly, this was a big part of its downfall, and not to mention the silly incentive game it got way too wrapped up in with Chrysler and GM. Look at how they all faired. What really gets me (and this goes to your comment about F over GM) is that it seems GM management has yet to figure out that less really is more. Duh, really? I believe the company will suffer as a result of that attitude in the long run. Hopefully, F PPS will de couple from GMs in the not too distant future. That would be great.

Another observation in all of this is the uncertainty behind F’s major management shift, which is pending. That may be putting investors (and potential investors) in a waiting game to see who succeeds Mulally. I’m not worries, however. I think much, if not all, of the company’s upper echelon management is unified under the “one Ford” plan and they will do what it takes to continue this goal.

Returning to dividends, I note your comment about the company ot upping…I disagree with that and here’s why. The Ford family owns a great deal of F stock and they have had to deal (as have the investors) without a dividend for just about 6 years prior to reinstatement. The Ford family will likely pressure management (and management will not cave and onnly up the divy if it makes sense) if the stock goes no where in value for the next few months. Say, for instance, it drifts between 10-12…definitely an argument for raising the divy.

Regarding investment grade increase from S/P or Moodys, I think it’s going to happen in the next 2-3 months. I’ve actually been thinking about buying the bonds as well.

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JT McGee May 13, 2012 at 21:40

GM will continue to make a thousand different cars with a million different unique inputs for each. I’ll never get it…ever. It seriously makes no sense to me. If anything, this is an industry where you want to do only one thing, and do it well. I think Mulally will be around for awhile, and even if he leaves, no big deal. I too think the vision is shared.

You make a good point on dividends. Not only does the Ford family retain pretty much all of the voting power (or at least all they need) but they have gone quite some time without any dividends on their holdings. As they wouldn’t want to give up any more shares (there’s an odd setup in the special voting rights that is contingent on a discrete ownership minimum), that does make sense that they’d push for dividends. What do you think a target proportion of free cash flow might be for a dividend? 50%? Maybe 40%?

I’d be all in the bonds if I could leverage inexpensively. TONS of money to be made there in what I perceive to be a near risk-free wager on the short-end of the curve.

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Rob May 16, 2012 at 07:16

So, I found it quite interesting that Buffet’s Berkshire Hathaway picked up 10 million shares worth of GM since end of March. I wonder if much of this has to do with the fact that much of F is controlled by the family and he had better options from an investment standpoint with GM? Maybe it’s politically driven with the elections looming in November? Curious to hear your thoughts on the matter. Either way, I think Berkshire’s investment in GM is probably good for most, if not all, the auto stocks in that it reflects the decent bullish sentiment in the auto industry going forward. Could be wrong on that one but I feel pretty good that Buffet is taking a positive long-term view on the autos. Always happy to hear your thoughts on this very new development…

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JT May 16, 2012 at 10:16

Ahh, I was so happy to see that over the wire yesterday.

I don’t really think it’s all that big of a deal, really. The position was small, less than a billion bucks, so it’s one of his newly hired investment managers making the selections, not Buffett. Either way, good publicity – it’s essentially an advertisement to investors to start accumulating auto stocks. Buffett has, historically, never been a fan of automakers, so I do not think it will become a big position at BRK.A/B.

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JT McGee May 19, 2012 at 15:14

Looking better in May…sales data for the first half of the month: http://www.edmunds.com/industry-center/commentary/a-quick-look-at-april-sales.html

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Rob June 18, 2012 at 05:50

I’m absolutely baffled at the way this stock trades. Given all of the positive mojo for this stock over the past 2 years, one would think this thing would be trading at $15+. I realize investors are forward thinking and are extremely worried about the Euro situation, but seriously, we all know how that’s playing/going to play out…I noted in one of my earlier messages that F seems tied to GM movement. I wonder if it will remain that way until the government sells its stake? In the market these days, it doesn’t seem to matter about fundamentals, just a lot of HFTs throwing their weight around. Very frustrating to say the least…

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JT June 18, 2012 at 11:27

I’m not even remotely concerned about Ford struggling going forward. Let eco-boost engines and higher credit ratings play out. BTW, have you seen Ford’s new 999cc engine? It’s nuts! In high-cost areas like Europe, Ford will essentially be making a car that literally pays for itself with lower gas consumption.

Time rewards investors who make smart plays. Ford may be a high beta name, but volatility has nothing to do with the underlying business. Investors have priced in way too much risk to the company. It’s only a matter of time until Ford proves itself. If markets were always rational, there wouldn’t be any money to make.

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Rob June 25, 2012 at 07:55

I definitely agree with you with respect to investors pricing way too much risk into F. Btw, I have seen the new 999cc engine and am absolutely impressed with it. Lots of great things happening. I also like the fact that F has really taken the lead in technology…once it has completely worked out the kinks in the My Touch screen (I believe it almost has), and make it more user friendly, I see it reclaiming a top spot in the JD Power Assoc rankings for quality, that’s for sure. It’s just with these macr headwinds, it’s completely stuck in a rut…I really hope the $10 valuation mark holds…if it drops below that, I’m wondering if I should buy more? What do you think? I have a fairly large stake already at $14, but maybe it’s worth adding down here? I’m wondering if the S/P upgrade is right around the corner as well? Who knows…

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JT McGee June 25, 2012 at 09:24

I’m going to start adding here at $10/share. I like the $8 strikes priced at $2.80 expiring in January 2014. Basically 3.3:1 leverage at the current price for all gains above $10.80/share by January 2014.

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Rob June 25, 2012 at 09:27

So you’re not going in with straight equity? That’s not a bad strategy…

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JT McGee June 25, 2012 at 10:39

If you have 10,000 shares at a $14 cost basis, you could bring your average down to $12 with 100 contracts for $2800. Granted, you need $10.80+ for a profit by January 2014, but I like the odds on wager there. Hell, a move to the $13 trading range that was so strong a few months ago would be a near double on your original investment.

Ford is priced irrationally. I think it all comes back to earnings vs. free cash flow. Full year 2012 EPS should be roughly $1.45-1.50/share compared to $5.01 in 2011. Just wait for that headline to come out…

So 2013 is the “action” year, IMO. Traders don’t understand accounting. Again, bad comparables this year + lower lease-derived revenues = market psychology problems. FY2012 profit = $1.45-1.50 vs $5.01 in 2011.

Best case scenario for us is that Ford remains weak this year as macro traders stay away. Then, in 2013, we get good comparables to make for “exploding!” earnings, which helps a pure momentum play like Ford. Look for $1.50 this year, and at least $1.65 next year. So 2014 calls make sense to me.

Just my 2 cents.

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Rob June 25, 2012 at 13:56

Don’t you mean that the total cost would be $28,000 for 100 contracts? In other words, $2.8*100 = $280 * 100 contracts = $28,000?

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JT McGee June 25, 2012 at 14:54

Yeah. I dropped a zero for some reason.

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Rob June 25, 2012 at 15:30

So if I understand correctly, assuming I F breaks out and goes to 12.80 (for arguments sake)…that would mean if I sell at that price point, my profits would be 20000, correct? In other words, $2 ($12.80 – $10.80) * 10000 = 20,000. Not bad, huh…that would definitely break me even on the equity side, ha

I do feel confident that the PPS would hit 12.80 or so at some point between now and Jan 2014…but why not pick up an OTM call…at say $10?

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JT McGee June 25, 2012 at 16:45

Yeah your numbers are right. At $10 you’re looking at a $1.71 premium, so profit is after a move to $11.71. That’s a steeper hill to climb, though entirely possible.

It’s really a matter of how much downside protection you want, and how much upside you expect. If F never trades much higher than $10 to Jan 2014, then you stand to lose $1.71 per call with $10 strikes compared to $.80 for the $8 strikes. I already have significant out of the money plays on F at the $12 and $17 strikes. My thinking is a rally would give me a chance to exit the $17 strikes before expiration at a profit, while the $12 strikes will probably be held to expiration.

My breakeven is currently at $14 by 2014, so we’re in the same boat. I could add more capital to my options trade to bring that down significantly with $8 strikes, a move I’m slowly starting to favor.

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Rob June 26, 2012 at 01:49

Well, I guess it all depends on how bullish we feel on this stock. While it’s quite possible, I do find it hard to believe we will never see the pps in the 12s or even 13s between now and Jan 2014, right? I mean, one can never tell but you may be right in that F’s time to shine may be 2013…I’m beginning to think it’s not this year with all the headwinds coming out of Europe. Who knows, 2013 could turn out to be exactly like 2012. Wouldn’t surprise me either way. We’re really just in a sh**ty economic rut with no signs of ending. I really can’t wait until our political jokers are finally faced with their own fiscal issues later this year. That should be fun…I’m likely to wait and see what happens with the market then (I’m betting it tanks) before adding

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Rob June 27, 2012 at 06:25

I’m really hoping the $10 level of support holds…seems like F has consistently held at this level since 1987 (barring its slow roast between 2005 – 2009). What I don’t understand is why it’s being so irrationally punished? Just as you said, I don’t beleive there is any reason the stock should be down this far. Really boggles my mind when you think about it. I think I’m going to hold off on calls for the time being…really want to see if this level holds. if not, we’ll be able to pick up those $8 calls for cheaper at least…

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JT June 27, 2012 at 14:28

I hope the $10 line holds, but don’t really think it is all that significant in the long term. You seem pretty stressed out about this, man. Best thing you could do right now is not look at the market price for the next few months or year. No stock is worth a heart attack.

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Rob July 2, 2012 at 01:57

I agree with you…it is short sighted to look at a stock’s price on a daily/weekly basis. yet, it’s difficult not to. In any event, my investment window with F goes out to the next UAW negotiation, which is in September/October of 2015, so i have plenty of time to ride this thing out. Good luck to you.

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Rob July 27, 2012 at 03:19

Been a while…hope things are well by you. I’m actually thinking about selling some covered calls on my long position. The question, really, is when do I hit the button to do so. I’ve been eyeing the Jan ’14 $15 strikes. However, the premium, like most others, is in the toilet due to the PPS plummeting. Any thoughts as to whether I should wait or whether I should just sell them now? I thought about setting limit orders in an around the .50 – .60 area, but wonder if that’s too high. While hindsight is always 20/15, I should have done this back in March when the premium was over $1. Oh well…

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