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Traders usually buy options to position for a stock moving, but just the opposite happened in the No. 2 U.S. automaker yesterday.
Check out this activity in Ford Motor (F):
The strategy appears to be a “short straddle” that’s designed to profit from F consolidating in a range through late July. The timing is noteworthy because the expiration targets the company’s next quarterly report on July 27. Let’s consider how it might work.
Calls fix the level where investors can buy a stock and puts lock in a potential selling price. It costs money to purchase either. Traders can also sell the contracts to earn premium now, and look for the prices not to move. There are several types of such “short volatility” or “market neutral” strategies. Tuesday’s was short “straddle” because it involved calls and puts at the same strike.
The trade generated a credit of $1.57, which will be its maximum profit if F closes at $12 on expiration. It will be profitable as long as the stock remains between $10.43 and $13.57. They face potentially significant losses outside of that range, although they may be using the options in conjunction with an existing stock position.
F rose 2.05 percent to $11.46 yesterday. It’s lost more than half its value since January, when it reached a 21-year high near $26. The shares have pulled back since then as supply-chain issues slow production. They’re also attempting to hold the $11.14 level where they bounced before rallying last year.
The short straddle was the largest options trade on a single equity in the entire session, according to TradeStation data. It pushed total option volume to more than twice the daily average.
Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See Characteristics and Risks of Standardized Options. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.
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