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Ford Motor Company (F) Option Bulls Bank on Solid Sales

Ford Motor Company fans picked up front-month calls on Monday

by 6/3/2014 9:22 AM
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Option Brief: Ford Motor Company (NYSE:F) option traders yesterday were banking on a solid May sales report for the Detroit darling. The stock saw roughly 37,000 calls change hands -- a 13% mark-up to the average daily volume, and more than five times the number of F puts exchanged.

Digging deeper, speculators were once again hungry for F's short-term contracts, as the security's 30-day at-the-money (ATM) implied volatility (IV) popped 3.1% to 16%. Sure enough, the June 16 call was far and away the most active, with more than 14,000 contracts exchanged -- nearly all on the ask side. IV jumped 2.1 percentage points, and open interest increased by the most of any strike. Plus, data from the International Securities Exchange (ISE) confirms that a healthy portion of the calls were bought to open.

By purchasing the calls at a volume-weighted average price (VWAP) of $0.54, the buyers stand to profit if F is docked atop $16.54 (strike plus VWAP) at the close on Friday, June 20, when front-month options expire. In fact, the traders' reward is theoretically unlimited north of this breakeven level. Risk, meanwhile, is capped at the initial premium paid for the calls, should F backpedal beneath $16 by options expiration.

Despite yesterday's 30-day ATM IV rise, F options are relatively cheap. The stock's Schaeffer's Volatility Index (SVI) of 15% stands just 13 percentage points from an annual low, implying that F's front-month contracts are inexpensive right now, from a volatility standpoint.

Ahead of this morning's monthly sales numbers, Ford Motor Company (NYSE:F) investors exercised caution yesterday, with the stock ending flat at $16.44. From a longer-term perspective, the equity has struggled to surmount the $16.50 region, which has contained all but one of F's weekly closes in 2014, while its year-to-date breakeven (just south of $15.50) contained the equity's pullback last month. However, while the aforementioned Ford option players were rolling the dice on a break of resistance, a group of option speculators targeting General Motors Company (NYSE:GM) -- which is also set to unveil May sales data today -- were banking on support.

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