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Trading Tools: Put Players Speed to Ford Following F-150 Recall

Could Thursday's put-heavy activity be the start of a new trend?

by 2/4/2011 10:57:12 AM
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In last week's edition of Trading Tools, I mentioned how General Motors Company (GM) had slipped in sympathy with Ford Motor Company (F) as a result of Ford's lackluster earnings report. This week, F is in the news again: on Thursday, the Detroit automaker announced that it will recall roughly 363,000 F-150 pickup trucks in North America. The trucks, which are F's best-selling vehicle, are being recalled due to a potential problem with the interior door handles.

This news isn't good for F. The car company has now recalled more vehicles in 2011 -- approximately 900,000 -- than in all of 2010, when roughly 600,000 were recalled. However, put players seemed to seize this opportunity, with the auto stock making several appearances in the Schaeffer's Most Active Options filter. Roughly 188,000 of these typically bearish bets changed hands yesterday -- well above F's expected single-session put volume of just 88,000 contracts.

In fact, Thursday's increased put activity is a sharp deviation from the norm for F. During the past two weeks, speculators on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open 4.38 F calls for every put purchased. This ratio of calls to puts ranks above 70% of all other readings taken during the past year, hinting at a greater-than-usual preference for F calls lately.

In the same vein, F's Schaeffer's put/call open interest ratio (SOIR) -- which compares put open interest relative to call open interest among options set to expire in the front three months -- of 0.59 ranks in the 39th annual percentile, pointing to a bullish leaning among short-term options players.

In fact, F's gamma-weighted SOIR of 0.70 confirms a relatively heavy accumulation of call open interest above the stock's current perch, as well as a relative lack of put support below the shares. Going forward, this hefty accumulation of overhead calls could exert options-related pressure on the shares.

On Thursday, F's February 15 strike was the most heavily traded put option, with over 26,000 contracts crossing the tape -- the majority of which changed hands at the ask price, suggesting that they were likely purchased. Overnight, open interest increased by 10,827 contracts, confirming buy-to-open activity at this at-the-money strike.

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