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Why Ford Stock’s Decline Could Just Be Starting

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Oct. 24 2019, Published 1:40 p.m. ET

In today’s trading session, Ford stock (F) is trading at $ 8.56, down 7.00% from the previous session. Ford Motor Company released its earnings yesterday after the market closed. The company beat Wall Street EPS and revenue expectations by $0.08 and $50 million, respectively.

However, Ford lowered its guidance—which became the main reason for today’s sell-off. Currently, options traders are making massive bets that Ford stock will continue to fall at least 5% in the following weeks. So, let’s consider the company’s actions activity to see if the stock will continue to plunge. 

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Options traders keep making massive bearish bets on Ford stock

The options, which expire on November 1, saw increased put buying in today’s trading session. According to Barchart.com, the open interest for the $8.50 puts rose by 2,608 contracts to a total of 7,912 open contracts. For the buyer of the $8.50 puts to earn a profit, Ford stock would need to fall to around $8.30.

Also, the open interest levels for January 17, at $9.00 puts, increased significantly this morning. The open contracts increased by 9,639 contracts to about 14,881. The open interest represents a total dollar value of about $1 million. For the buyer of the $9.00 puts to earn a profit, Ford stock would need to plunge to around $8.30.

Also, the open interest levels for November 15 $9.00 puts doubled early today. The open contracts surged by 4,596 contracts to about 9,334. Ford stock, then, is a large, bearish bet. It’s a big wager, considering a total dollar value of the transaction of about half a million dollars. For the buyer of the $9.00 puts to earn a profit, Ford stock would need to plunge to around $8.40.

Finally, during today’s trading session, the open interest for the $8.50 calls that expire on November 1 rose by 2,013 contracts to a total of 8,285 open contracts. At first glance, you could interpret these numbers as a bullish bet. However, this transaction traded near the bid price, suggesting the calls were sold. Having said that, Ford stock is a bearish bet right now. The stock should stay below the $8.40 price level to break even for the options holder.

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How much volatility are options traders expecting for F in the coming weeks?

The implied volatility for the options, at an $8.50 strike price that expires on November 8, stands at 32.03% for Ford stock. This number means investors expect some event that could cause moderate stock’s move in one direction or the other. For instance, the SPDR S&P 500 Trust ETF’s (SPY) implied volatility level stands at 11.85% for the same expiration date. Traders expect, therefore, that Ford stock will be more volatile than the overall market.  

If we take a closer look at the November 8 options, we can see a bid/ask for the $8.50 call option of $0.26/$0.27. We can also see a bid/ask for the $8.50 put option of $0.16/$0.17. And consider that the options strike closest to the F price is $8.56 at the moment of this writing. We can calculate the expected price move as follows, using the mid-prices of these options:

0.265 (8.50 put) + 0.165 (8.50 call) = 0.43/8.56 = 5%

As you can see, the options imply that F stock could rise or fall by ~5% by the November expirations from the $9.00 strike price. To assess the expected price movement, we use the long straddle strategy. This estimation would place the stock in a trading range of $8.13–$9.00 by the November expiration.

Plus, the puts at the $8.50 strike price outweigh the call options by about 360%. There are 2,600 open puts versus 721 open calls. This imbalance suggests bearish market sentiment for Ford stock.

Looking for more companies that options traders are actively betting against? Check out General Electric Stock: Be Careful, Investors and Netflix Stock: The Decline May Just Be Starting.

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