Ford Stock Option Trade Can Profit 6.3% Without Even Owning Shares

Ford ( (F) stock has pulled back in recent weeks and could be setting up a good opportunity for value investors. 

X

One way to take ownership of a stock for less than the price it is currently trading is via 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. 

A cash-secured put 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. 

Neutral To Bullish Trade

Let’s take a look at an example using Ford stock. 

With the stock trading at 16.37 Wednesday, investors could sell an April 14 put with a strike price of 16 for around $0.95. 

An investor selling this put would receive $95 into the account, which would be theirs to keep. If Ford falls below 16 by April 14, the investor would be required to buy 100 shares at 16. The effective net cost of the position would be 15.05 thanks to the option premium received. 

That’s 8.06% below Wednesday’s closing price. 

If the stock stays above 16 at expiry, the put expires worthless leaving the trader with a healthy 6.31% return on capital at risk. 

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 premium received for selling the put partially offsets that loss. 

The maximum loss on the trade would occur if Ford stock fell to $0, which would see the trade lose $1,505. But most traders would cut losses long before then.  

Strategy Can Generate Healthy Returns

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 base. He or she can potentially begin selling covered calls to generate further income from the position. 

According to the IBD Stock Checkup, Ford stock is ranked No. 4 in its industry group and has a Composite Rating of 53, an EPS Rating of 22 and a Relative Strength Rating of 84. 

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 

YOU MIGHT ALSO LIKE: 

What Is An Iron Condor? This Trade In UnitedHealth Stock Could Produce A $315 Profit By April 

McDonald’s Stock Option Trade: A Bearish Strategy On This Dow Jones Component

Looking For Market Insights? Check Out Our IBD Live Daily Segment 

As Vertex Stock Looks More Bullish, This Trade Limits Risk 

Chevron Stock Option Trade Profits If Price Stays In This Range