F Stock – Ford Stock: After Bullish Breakout, Option Traders Eye Cash Secured Put
Ford stock has rallied impressively in recent weeks amid signs of accumulation and an improving relative strength line.
With Ford (F) trading above the 21, 50 and 200-day moving averages, the medium-term prospects for Ford stock look good. The relative strength index is a little extended at 76, so we may see some short-term pullbacks, but that should be a buying opportunity.
One way to take ownership of a stock for less than the price it is currently trading is with an option strategy called a cash secured put.
A cash secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
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It involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start out with options. They are very similar to a covered call and are quite easy to understand once you know the basics.
It’s important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
Ford Stock Option Trade
Let’s take a look at an example using Ford stock.
With the stock trading at 15.88 Monday, investors could sell a Sept. 17 put with a strike price of 14 for around $0.75.
An investor selling this put would receive $75 into their account which would be theirs to keep. If Ford falls below 14 by Sept. 17, they would be required to buy 100 shares at 14. The effective net cost of the position would be 13.25 thanks to the option premium received.
That’s 16.4% below Monday’s closing price.
If the stock stays above 14 at expiry, the put expires worthless leaving the trader with a healthy 5.65% return on capital at risk.
Some traders may prefer to wait and see if Ford stock pulls back. In this case, the Sept. 14 strike put could be sold for a higher price.
The main risk with the trade is similar to outright stock ownership. That is, if the stock falls quickly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
The maximum loss on the trade would occur if Ford stock fell to 0 which would see the trade lose $1,325 but most traders would cut losses long before then.
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Cash secured puts are a wonderful way to generate a healthy return on strong stocks, potentially without ever having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost basis and can potentially begin selling covered calls to generate further income from the position.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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