Risky strategy pays off if F holds at supports
After being taken out to the woodshed for two months straight, Ford (NYSE: F) may be ready to come back in the house to play with all the other well-behaved bullish stocks. Over the past few weeks this automaker has flashed multiple signs that the selling pressure is abating and demand is on the rise. First, the downtrend exhibited slowing momentum as each successive down swing dropped less and less. Second, it held its 200-day moving average. And third, it recently broke above the $14.75 resistance level.
Options tradings investors of the opinion that Ford has abandoned its bearish aspirations may consider selling the F May 14 Put option for $.40. By selling this put, option traders obligate themselves to purchase shares of Ford at $14. After taking into consideration the $.40 premium received, the cost basis comes out to $13.60. Provided Ford remains above $14 by May expiration, the puts will expire worthless allowing traders the ability to keep the $.40 premium. While $.40 doesn’t seem like that much reward, on a $14 stock it’s actually not too shabby.
Check with your broker whether you can sell naked options in your account. Many brokers limit this strategy to certain types of accounts.
To increase the consistency of their results and the likelihood of long-term profitability, successful traders develop a game plan for each and every trade. In the case of short puts I typically buy to close the option once I’ve captured the majority of my profit (80% or better). If the stock continues to fall I either exit once support is breached ($13.75 for F) or consider riding to expiration and allowing assignment if I’m a willing buyer of the stock.
Ford (NYSE: F)
(Source: MachTrader)
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