Speculative play on F?

[Kerim]

Ok, so help me with ideas on how to play this hunch for fun. This is just going to be a few speculative dollars and not really related in any way to my dividend growth portfolio (although I do happen to hold some Ford in that portfolio).

I think F is going to do well over the medium-term, but I've got enough shares outright so don't want to just buy some more long shares. Plus I don't want to tie up much powder on this play.

I'm tempted to buy the January 2016 $15.00 strike, which is currently going for $3.40.

What do you think? I have very little options experience or knowledge -- is there an obviously better approach?

Thanks!

[NilesMike]

That option is "only" 65 Delta +/- meaning you gain 65% of any price move up prior to expiration.

I normally like the higher Delta, but it's not a bad speculative play. There does not seem to be a lot of premium that you could sell to offset your cost. You're only paying 2.08 for the extrinsic (time) value.

The obviously better play (according to backtests) is to sell naked puts.

[Kerim]

Thanks NilesMike. Maybe I'll watch it a bit before jumping in. Naked puts are a little exotic for me, I think.

[NilesMike]

(12-16-2013, 09:26 PM)Kerim Wrote: Thanks NilesMike. Maybe I'll watch it a bit before jumping in. Naked puts are a little exotic for me, I think.

Not specifically Ford related, but why is selling a naked put exotic to you?

Strategically it is similar to being long stock stock. The difference being your gain is capped and you may own the stock at a better price than if you just went long the stock.

[Kerim]

Perhaps I misunderstand the strategy. I thought what it means is that I sell the put and essentially offer to buy F at, say, $15, and I collect the premium. If my thesis is right and F rises, the put expires worthless and I walk away with the premium. If F declines, I’ll either have to buy out the position at a loss or buy the shares at $15 each. If that is how it works, I guess my problem is that I don’t want to accumulate any more shares long, and I don’t want that downside exposure. If I just dabble in inexpensive call options, all I’m risking is the premium I pay for those options. Have I got it or am I overlooking something?

Here’s another question for you while I’m at it. Say I’m looking at the Jan 2015 calls, what does conventional wisdom say about choosing a strike price that is in the money or out of the money? I guess I’ve assumed it is better to grab something with a little intrinsic value, but perhaps it makes no difference?

As I write these questions, it is perhaps apparent that I know so little that I have no business playing around with options at all. So I’ll just reiterate that this is for fun and learning and speculation only and I am only playing with very very small amounts of money that I would be fine losing.

Thanks so much for your help!

[NilesMike]

You have the concept correct. However the buying of options is where the fly gets into the ointment. When you buy you have to be right twice. You have to be right the direction and right with the time frame.

When you sell the option you can be wrong directionally and still win. Simple example, collect $1.30 on the $15 strike. Your breakeven is now at $13.70 and the stock is $16.70. lots of room in there. So the stock can go against you $3.00 and you're still alright. 55% probability of expiring above 15.00 (JAN15 prices)

On your LEAP, the stock MUST move long to benefit you and the sooner the better as each day goes by, your long call decays in value.

Slightly giving you the edge when you sell premium. When buying, you do have the slight chance of hitting a home run.

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(12-17-2013, 10:09 PM)Kerim Wrote: Here’s another question for you while I’m at it. Say I’m looking at the Jan 2015 calls, what does conventional wisdom say about choosing a strike price that is in the money or out of the money? I guess I’ve assumed it is better to grab something with a little intrinsic value, but perhaps it makes no difference?



Thanks so much for your help!

The deeper in the money that your LEAP is, the more it costs but the time premium is much less. You can be "right" on direction at a much later date and still get paid better.

[TomK]

If you pulled the trigger on this one already, I hope you got today's discount! Ford is taking a beating today!

[Kerim]

I didn't jump in yet. Sure glad I waited too. Now have to decide whether this is a bargain opportunity, or a sign of a less bright future than I had figured.

[TomK]

Down again today -- you may be getting a much better entry point!

[ronn38]

Morning star sent me an alert this morning that its now rated as a 5 star stock. Morning star continues to be bullish on the company, "We think the market overreacted on the news and overlooked some excellent new information on the pension." I tend to like their analysis and refer to it (along with Dividend Growth Investor) when considering purchases.

Hmmmm... don't own any car companies....

Ronn

[Kerim]

I've got about 200 shares of F I'm holding long in my DG portfolio. Not sure it is a "forever" stock, but I am optimistic in the medium term that they'll grow the dividend nicely and the share price should follow. I'm not really interested in more long shares, but as I've said, looking to play around with the options and think F is a good leap candidate.

If you don't have any yet, could be a good non-core holding. Though I am less sure about today's prices. It was more of a no-brainer back at $9 per share with a P/E of 4.

[ronn38]

I was looking at Ford and I'm interested in some insights from you all.

Ford of course cuts it's dividend in 2007, but prior to that, hadn't raised it for a spell (Morningstar only goes back 10 years so...). The payout ratio is a nice 14%, but I'm not sure they have much incentive to raise their dividend, especially if they are struggling in Europe, etc. It seems to be this is a play on the market value of the stock going up; which indeed it may, but that's a whole different ball-game than we usually play here;-)

Are we assuming any company with that low a payout ratio will raised dividends to attack buyers to the stock, is that the play? I think the company has a future and will be around for many more years... but I guess this, at least to me, seems like a gamble.

Ronn