Automaker Ford (F) has seen shares rally over 30 percent since the start of the year, from $8.50 to $11.50. One trader sees the move as too much, too quick.
That’s based on the September 2021 $10 puts. Over 10,020 contracts traded, a 20-fold rise in volume from the prior open interest near 500. With shares at about $11.50, it implies a drop of nearly 15 percent for the trade to move in-the-money.
The trader paid about $1.22 for the option. Shares of the carmaker are up about 28 percent over the past year. While the company reported a narrow loss in the most recent quarter, auto sales have held up well during the pandemic, as many without cars in densely-populated cities bought one, or wealthier Americans bought vehicles.
- Insurance For Your Investments? The Answer...Options
Investors are reevaluating how to do things in 2021. With Options, a stock’s price can drop to zero, but you can never lose more than the option’s premium and you know the full amount at risk right from the get-go.
Options are the most dependable form of hedge, and this also makes them safer than stocks.
Action to take: The run up in shares in the past few weeks does fall into the “too far, too fast” category. Even if shares can head higher, they’re likely due for a pullback. This September trade is excellent, as it has more than enough time to play out and is relatively inexpensive per contract.
Traders can likely earn high double-digit gains on the trade if shares have a quick selloff. Even a slower, multi-month selloff can still win for traders, given the time involved before the option’s time decay really sets in.