Stock Options To The Rescue! Ford Motor (F)
Today we’re going to look at Ford Motor (F) and how you can use options to reduce your risk, lock in profits, and give you upside potential.
Here’s what happened…
F reported 3rd quarter earnings while the markets were closed on Tuesday. Strong sales in North America drove profits well beyond Wall Street estimates. And the stock has jumped 9% from $10.36 to $11.33 following the release.
Here’s the deal…
Slowing worldwide vehicle sales caused Ford’s revenue to fall 3% last quarter. But they still managed to exceed Wall Street expectations with $32.1 billion in sales.
Profits in Ford’s North American division hit $2.2 billion last quarter as operating margins surged to 12%. The strong profits at home help offset losses in Europe. And they posted $1.63 billion in profits or 41 cents per share. EPS easily beat the 30 cents per share analysts were expecting.
Here’s the kicker…
F’s strong performance in the 3rd quarter caught many experts by surprise. They believed Europe’s weak economy and the sluggish recovery in the US would lead to slowing profits.
But Ford delivered a masterful quarter. They managed to boost sales in North America by 8% and increase profit margins to 12%! Those are impressive numbers for a US automaker.
But F still faces a long road ahead…
The European economy is still a mess. They’ll likely lose a least $3 billion in Europe over the next two years. And they’re still struggling to establish the brand in China and other fast growing markets.
Going forward, Ford will have a hard time matching the 12% margins they posted in the US, Europe will continue to be a drag, and they’ll need to spend more money to establish their brand in China.
There’s no denying the company’s strategy is delivering impressive results so far. But the 3rd quarter could be a peak in profitability.
In other words, there’s a lot of uncertainty about how Ford will perform in the future.
Here’s what to do now…
Let’s assume you invested $1,000 to buy 100 shares of F at $10 per share ahead of the third quarter earnings announcement. You’re sitting on a solid 13% profit.
With so much uncertainty ahead, it’s a good idea to lock in some profits, reduce your risk, but still give yourself the ability to profit if F continues to move higher.
Selling your F stock and buying the F March 2013 $12 call option for $0.46 is a great way to lock in profits, reduce your risk, and give you upside potential if F continues to move higher.
Right now you can sell your F stock for a $1.33 per share profit. That’s a $133 profit on your F investment. And buying the F March 2013 $12 call option for $0.46 will cost you $46.
In essence, you’re giving up 34% of your profits in order to lock in an $87 profit on F ($133 stock profit – $46 option price). That’s still a solid 8% profit on your original $1,000 investment. And that’s your worst case scenario. No matter what happens to F’s stock price from here, you’ve guaranteed yourself an $87 profit.
And the call option gives you the ability to increase those profits.
The breakeven on your call option is $12.46 ($12 strike price plus the $0.46 option premium). If F is at exactly $12.46 when the option expires in March, you’ll get back your $46 investment. And your return on investment will be back to what it would be if you just sold the stock today.
But if F rallies beyond $12.46, your total profits will be more than if you just walked away today. In fact, if F makes it back to its 52-week high of $13.05 when the option expires, your return on investment will shoot up to over 19%.
As you can see, replacing your F stock holdings with a call option allows you to lock in profits, reduce your risk, and still gives you upside if the stock continues to rally.
Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
