Options Analyst Alan Knuckman offers up another easy-to-follow options trade that could be his most lucrative yet. See just how you can trade this stock to potentially earn 300% returns in only seven months.
FORD Staying Power …with over seven months to be right
FORD stock has been in reverse gear, down 17% so far in 2016. In “what have you done for me lately” mentality Wall Street worries about following up on record auto sales last year.
Improving consumer confidence combined with historically low interest rates have Ford sales on pace to perform well once again with close to 2015 numbers.
The price to earnings ratio has fallen to under 6, an amazingly modest number in comparison to the valuation of the overall stock market.
Ford’s funk has the automaker sideways between $12 and $14 for most of the last year of trade. An upside breakout targets a $2 measured move to $16, which stands more than 35% higher than the current price.
With the $11 support right below, the reward to risk equation favors the BULLS at these levels.
This is an opportunity to use the power of options for a capital preserving stock substitution strategy.
The June option has seven plus months for Bullish development
The actual shares are inexpensive compared to some other stocks but long-term money potentially tied up in the stock play could be put to better use. An In-The-Money option gives you the right to be long with the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk
A Ford long call option can provide the staying power in a potential larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares; that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent long shot price explosions.
Good options can profit from just modest directional moves.
Any trade has a fifty/fifty chance of success. Buying In The Money options increases that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it; the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With Ford trading at $11.75, for example, an In The Money $10 strike option currently has $1.75 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the June FORD $10 Call at $2.00 or less
A close in the stock below $10 on a weekly basis would trigger an exit. Notice the $10 strike has the right to be long from a discounted level last seen in 2012.
An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.
The option also behaves much like the underlying stock with a much less money tied up in the investment. The Delta of this $10 strike is 84% plus.
The June option has over seven months for bullish development with the right to buy at nearly the lowest level in the last year.
The maximum loss is limited to the $200 or less paid per option contract. The upside, on the other hand, is unlimited.
The FORD option trade break even is $12.00 at expiration ($10 strike plus $2.00 or less option premium). That is just 25 cents above F’s current price.
A push above $14 channel top resistance targets $16, which would put the option value at $6.00 to triple the original investment. My strategies for these simple stock substitution trades are simple. Put yourself in the highest probability situations that give you the best chance for a fast and large return on your money. But what should you do with the profits after you close out the trades?
My colleague Tim Plaehn has an answer to that question. Right now he is offering entry into his exclusive Monthly Dividend Paycheck Calendar program that is a system for generating a large monthly income stream from the market’s most stable high-yield stocks.