Is Ford Getting Into Gear? Options Traders Say 'Yes'
Think America is slowing? Think again, say Ford option traders.
Yesterday, as U.S. equity trading resumed, Ford reported an EPS beat for its third quarter earnings. This sent shares 8.2% higher on the day, and drew the attention of options traders.
The biggest trade of the day was the purchase of 11,111 December 12-strike calls for $0.11 each, which was done with the stock at $10.85. This is a bet that Ford will be above $12.11 at expiration, or 8.5% higher than yesterday's close.
Why bet on Ford now?
The bullishness undoubtedly comes as a result of Ford's robust domestic sales, which more than made up for weakness in Europe. Ford's North American operations posted a pre-tax profit of $2.3 billion, which is the best third quarter the region has ever recorded. This profit was driven by impressive margins, which came in at 12% and were attributed to the sales of high-end trucks. In Europe, Ford posted a $468 million loss, and said it could lose up to $500 million next quarter. Year-to-date Ford has lost $1 billion in Europe, which has led CEO Alan Mulally to announce a major European restructuring, as well as layoffs.
Though Ford's numbers this quarter are good, it is still unclear if North America can carry the company through a European recession. If Ford's European restructuring is able to minimize losses while sales remain robust in North America, the company will be fine— but that is a big "if."
Still, if you are intent on playing Ford, I like this strategy, because it keeps risk fixed and it profits from the momentum the stock might have after a great quarter like this one. Ford's chart suggests that the stock is likely to test the $12-$13 range it traded in during the first quarter of 2012, which would indeed make the December 12-strike calls a smart buy.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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