Buy Ford Stock For $0.10!
Today we’re going to look at buying stock.
But, in an exciting way… we’re going to do it using options!
This is an option strategy known as synthetic long stock.
It’s done with a combination of puts and calls. More specifically, we’re going to look at selling put options and buying call options.
And by doing this, it closely simulates the move of just owning a stock outright. With one important benefit… it costs much less money than buying the stock outright.
What stock are we going to use for an example?
Obviously, I want one with a great shot at making money.
And the winner is… Ford (F).
The trading action following Ford’s first-quarter earnings report last Friday has been nothing short of ugly. After opening higher, Ford quickly suffered a nasty about face.
Investors quickly turned negative after digesting the automakers’ results. They realized weak foreign sales and high gas prices may hurt sales in the coming quarters.
As a result, the stock finished the day with a nasty 2.25% loss after very heavy trading.
Despite the heavy selling, Ford was able to hold the key support level at its 200-day moving average of $11.50 a share.
However, the losses continued Monday morning. The stock fell below this key support level after it traded down 3% to $11.25 a share.
Here’s the thing…
The post-earnings weakness has pushed the stock to within pennies of the 2012 lows of $11.15.
The good news is buyers are finally stepping in to buy Ford at this level. In fact, I think we could see F bounce off of this support zone and be back above $12 in short order.
Buying Ford stock at this level could be very profitable, but there’s no reason to pay $11.25 a share. That’s a little rich for my blood!
So, we’re going to use the September options to buy the stock synthetically.
Let’s get started…
As I said before, this trade has two legs… a call and a put.
First, sell an F September $10 strike put for $0.40 a share.
We’re selling this strike because it’s out-of-the-money and well below multiple levels of support. So there’s very little chance of this option being in the money at the September options expiration.
Next, buy the F September $12 strike call for $0.50.
We’re buying this option because we think there’s a high probability of Ford being above $12 in September.
By selling the put and buying the call, it costs us a total of $10 per contract. I’m not joking, $10 per contract. And since each contract controls 100 shares, we’re essentially buying 100 shares of F for 10 cents apiece!
Before we finish, let’s look at a few possible outcomes…
First, above $12.10 per share we have unlimited profit potential.
Second, if Ford is between $10 and $12 at expiration, we will lose our $0.10 per share. Worse things are possible!
Finally, since we’re short a put contract, your broker will set aside money in your account in case at expiration you’re assigned the stock and forced to buy it at $10.00 per share.
Bottom line…
A synthetic long stock is a safe and prudent option strategy to get very similar exposure as buying the stock, but at a much cheaper price.
Best of all, you can use this strategy to buy shares of any stock as long as it trades options. Just remember, you could end up owning the stock if it falls below the short put option strike price.
Safe Trading,
Marcus Haber
Category: Options Trading Strategy
