Ford, GM Blitzed By Option Bulls on Mexico Trade Progress

F and GM stocks are higher this afternoon, and call buyers expect more upside

Aug 27, 2018 at 2:06 PM
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Stock market indexes are notching record highs today, after President Donald Trump announced a trade deal between the U.S. and Mexico. While Canada and Congress still need to sign off on any (soon-to-be-renamed) NAFTA negotiations, the deal would bolster the required amount of U.S.- and Mexico-made auto content to 75% from 62.5%. Against this backdrop, car stocks Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) are higher today, and call options are flying off the shelves.

Traders Expect Ford Stock to Top $10 Soon

Ford stock is up 3.1% to trade just under $10. The shares have been in a channel of lower highs since peaking about four years ago, and touched a six-year low of $9.35 on Aug. 15. Despite today's pop higher, F shares are still down 0.5% so far in August, set to extend a seasonal slump.

ford stock chart aug 27

However, it looks like options traders are expecting Ford stock to jump into double-digit territory before the weekend. So far today, roughly 58,000 calls have changed hands -- twice the typical intraday pace, and double the number of F puts exchanged. Most active is the weekly 8/31 10-strike call, where traders are apparently buying the contracts to open. The calls will move into the money if F tops $10 by the close on Friday, Aug. 31, when the options expire.

Even before today, though, F options speculators were picking up calls at a faster-than-usual clip. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day call/put volume ratio of 2.91 is higher than two-thirds of all other readings from the past year. This indicates a healthier-than-usual appetite for bullish bets over bearish in the past two weeks.

GM Call Volume Running at Twice the Normal Pace

General Motors stock is up 4.8% to trade at $37.67, set to top its 20-day moving average for the first time in two months. However, upward momentum could stall in the $38-$39 area -- where GM shares landed after a July 25 bear gap, which stemmed from the automaker's ugly full-year earnings forecast. This region is also where GM was trading before a massive bull gap in May, and a neighborhood that acted as a speed bump in early 2017. From a longer-term perspective, though, the Detroit darling has been in a channel of higher lows since November 2016.

GM stock chart aug 27

GM calls are also crossing the tape at twice the average afternoon clip, with roughly 45,000 traded so far -- compared to around 20,000 puts. The September 38 call is most popular, with nearly 7,300 contracts traded. Meanwhile, the weekly 8/31 37-strike call has seen what appears to be buy-to-open activity, suggesting traders expect the shares to extend their journey above $37 through the end of the week. Among the biggest single trades, however, is a block of 2,000 December 37 puts, which look like it was purchased to open, to either bet on or hedge against GM backpedaling south of the strike within the next few months.

During the past two weeks, calls have been the options of choice among premium buyers. The stock's 10-day call/put volume ratio of 2.95 indicates that nearly three General Motors calls were bought to open for every put. This ratio is in the 61st percentile of its annual range, pointing to a slightly bigger-than-usual appetite for long calls of late.

Whether bullish or bearish, options buyers could find comfort in the equity's Schaeffer's Volatility Scorecard (SVS) of 90 out of a possible 100. This indicates that GM stock has had no problem exceeding options traders' volatility expectations in the past year.


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