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Good News Causes A Bullish Frenzy Over Ford Motor Company (F)

Traders snatch up calls in light of F's announcement

by 5/3/2013 2:13 PM
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Ford Motor Company (NYSE:F) made headlines this week when it announced its plans -- in response to its 27% increase in truck sales in April -- to add more than 2,000 jobs at its Kansas City Assembly Plant. The good news was well accepted among bullish traders, causing Ford's stock price to jump overnight from yesterday's closing price of $13.41 to $13.58 at the sound of this morning's opening bell. So far today, 89,000 calls -- two times the daily norm -- have changed hands, compared to 14,000 puts.

Among today's most active options for F is the May 14 call, where nearly 25,200 contracts have been exchanged at a volume-weighted average price (VWAP) of $0.12. Of these contracts, 74% went off the ask price -- a complete change from yesterday when 71% went off the bid -- and implied volatility increased 1.3 percentage points to 21.2%, implying that the majority of the calls are being bought to open.

For these call buyers to profit from this play, Ford has to trot north of the breakeven price of $14.12 (strike price plus the VWAP) -- 18 cents shy of its 52 week high of $14.30 -- by the close on May 17, when the option expires. If the stock remains below the 14 strike, the call buyers will lose the initial premium paid.

Likewise, over the past two weeks, options traders have bought to open more than three calls for every put, according to F's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 3.32.

In the past year, Ford has risen 25% to its current perch of $13.80. However, it still has to climb roughly 10% before reaching analysts' average 12-month price target of $15.20.


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