Ford Options Traders Bet Stock Will Fall 25% This Year

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Not all investors are bullish about Ford Motor Co. (F). In fact, options trader are betting Ford shares will fall – not rise – by yearend. The options that expire on January 18 of 2019 suggest that traders are looking for Ford to fall by nearly 16 percent to roughly $9.30. aND some are betting the decline could be even steeper, to about 30 percent. 

The outlook of options traders is in stark contrast to Morgan Stanley's upgrade of Ford to overweight from underweight while raising its price target to $15 from $10. Analyst Adam Jonas believes believes sentiment may have hit a low in Ford while reaching attractive valuations. (See more: 
Ford Shares Jump on Morgan Stanley Double Upgrade.)

But most analysts on Wall Street put Morgan Stanley's view in the minority. According to YCharts, of the 24 analysts that cover Ford, only four rate the stock a buy or outperform, while 20 rate the stock a sell or hold.

Wide Implied Trading Range

(Interactive Brokers)

The long straddle options strategy using the $9.87 strike price implies that Ford's stock could rise or fall by 21 percent from that strike price. This would put the stock in a trading range of $7.75 to $12.00.

But the number of bearish bets far outweigh the bullish ones, with nearly 266,000 contracts of open puts to only 40,400 contracts of open calls. That's a ratio of more than 6 to 1. This suggest that more traders are betting on Ford shares to fall over the course of 2018 than rise. 

A Falling Stock

Furthermore, a buyer of the $9.87 puts would need to see the price of Ford stock to fall to roughly $9.30 for the options to break even, and below $9.30 to make a profit. The trade is no small bet by the way, with a notional value of nearly $15 million. 

That's a monster bet when considering the time until expiration and the implied volatility of about 24.5 percent. The S&P 500 has an implied volatility of only 16 percent by comparison. This makes these options very expensive to purchase.

Some are even betting Ford shares will fall to roughly $7.70, with 132,000 open put contracts at the $7.87 strike price. This bet is much smaller by comparison, with a notional value of just $2.24 million. 

No Growth

Currently, the growth outlook for Ford is non-existent. Earnings are expected to decline by 11.5 percent in 2018 to $1.58 a share, and fall by another 4.5 percent in 2019, and by 1.5 percent in 2020. Revenue growth is expected to remain flat as well, with revenue rising and falling in a range between $146.8 billion and $148.7 billion. 

There are plenty of reasons to be bearish about Ford, with no growth on the horizon. And for now, the options traders are all over it. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.