Bears take the wheel at key automaker

Automakers lost traction even before the market fell last week, and one big option trader thinks a key name in the sector may continue to skid lower.

Heavy activity was detected in Ford Motor (NYSE: F) on Monday, led by the sale of 13,974 May 12 calls for $0.18. A matching number of 28-April 13.50 calls were bought at the same time for $0.03 as the investor rolled an existing short position to the lower strike and further into the future.

Calls are contracts to buy a security, so they generally gain value when shares push higher. But they can also be sold to mimic a short, or downside, bet. Then traders keep the premium as profit and hope the shares drift or fall. 

In this case, they collected about $209,000:

  • Net cost: $0.18 - $0.03 = $0.15 
  • Each contract controls 100 shares, so $0.15 x 100 = $15
  • There are 13,974 contracts: $15 x 13,974 = $209,610

They’re looking for F to remain below $12 through the third Friday in May. There is potentially unlimited risk if it climbs above that level because such a move would render them effectively short almost 1.4 million shares.

The trader apparently sees little risk of that happening because “rally” hasn’t exactly been in F’s vocabulary of late. Its 2017 high of $13.27 occurred on January 4, followed by months of consolidation in the $12s while the S&P 500 hit new records. The year before it mostly chopped in the $13s, which was below 2015’s range of $14-16. In other words, lower lows and lower highs…

F & S&P 500, 5-yr chart

Source: OptionsHouse by E*TRADE

Sellers took the wheel with vengeance again on March 20, and drove the stock sharply lower. Maybe they had a crystal ball because management warned just three days later that rising costs and weakening sales would drag on profit.1

Now bean counters at Moody’s Investors Service are throwing gasoline on the fire by cautioning that lower volumes may force automakers to sweeten incentives for potential buyers.2 The credit analysts added that car loans have grown riskier in recent years (longer terms and less money down), which increases odds of consumers missing their payments: Not the best news for a company whose $140 billion debt load surpasses the gross domestic product of countries like Hungary and Ukraine.

F fell 1.38 percent $11.46 on Monday, its worst close since early November. Overall option volume was about 5 times greater than the average over the last month.

1. Ford's stock drops after profit outlook was below expectations: 3/23/17.

2. Reuters: Plateau in U.S. auto sales heightens risk for lenders: Moody's. 3/27/17.