A Limitless Profitable Trade In This Visionary Company Won’t Be Tough…

When you think about stock investing, picture it as a world seen through bifocal lenses. There are those looking at what is directly in front of them: the short term, next quarter, a single product launch, etc. Then, there are others looking beyond to long-term growth, research and development and financial stability.

When one part goes into focus clearer than the other, it is usually time for a new prescription. For legacy companies, giants that have outlived their founders by decades, there’s no better analyst out there than Jim Collins, author of Built to Last: Successful Habits of Visionary Companies.

Here’s what he had to say on how these kinds of successful companies look at their businesses:

“Those who built the visionary companies wisely understood that it is better to understand who you are than where you are going—for where you are going will almost certainly change. It is a lesson as relevant to our individual lives as to aspiring visionary companies.” 

― James C. Collins, Built to Last: Successful Habits of Visionary Companies

For one of these “visionary companies,” it seems that message was received.

If you watch any television at all, you’ll likely see this commercial, narrated by Bryan Cranston:

“Some will talk about the future. But you’d be a fool to believe them. You see, talk doesn’t get things done. Building does. Building, like we have for the last 115 years… and building for the next century. Building cars, new technology and transforming cities. So, let the other guys keep dreaming about the future. We’ll be the ones building it.”

— Ford’s “The Future is Built” Commercial, 2018

Ford touched on the key quality of a visionary company from Collins’ book. It believes its core is to build the future rather than guess at it. It’s a powerful message. But as noted, not all investors see out of the same part of their lenses.

Pundits, commentators, analysts and investors of Ford have all been driving home the company’s lack of clear messaging on its future when it comes to automation. Obviously, this will be a big part of the future of the auto industry. But Ford isn’t the kind of company to put everything into one basket and hope it picked right.

Let’s look at what the company has done, instead… as opposed to just what it hopes to do.

Confusing News Due to Shortsightedness

First of all, Ford hasn’t given up on competing in this lucrative future of driving automation. It has partnered with Argo AI to try and keep up with GM’s Cruise and Alphabet’s (Google’s) Waymo. Ford is also partnered with Baidu (often called the “Google of China”) for its Apollo autonomous driving platform. There are also rumors of a potential deal with Volkswagen in the same vein.

So, just because it hasn’t made the headlines on this front as its competitors have doesn’t mean it isn’t finding its own path into this lucrative field.

Secondly, Ford has been hit hard by its large China business. The company has made huge investments into the country, only to be let down by the recent economic struggles in it. Sales for Ford’s China division are down 45% in October from the previous month. Still, once all the dust from the tariff wars settle and China gets back to growth, Ford will be there. The company also recently announced a new model of SUV specifically for the Chinese market that has already been well received.

What have investors done with all of this conflicting news at Ford? About what one would expect from a group that likes to focus on the short-term and ignore the overall vision that brought Ford more than a century forward:

ford1.png

For the past year, Ford’s stock has been getting absolutely crushed, falling nearly 40% from its January highs to last month’s low. But, as you can see, one solid quarter two weeks ago sent the stock in the opposite direction.

This is just the smallest whiff of how fickle investors have been with Ford of late. But it also sets up a nice trade for anyone looking to play this shortsightedness.

A Strategy to Play Undue Volatility From Shortsighted Investors

It’s not clear which indicator investors will cling to next. Will another series of bad sales figures from China send F crashing back down to its mid-October range? Or will a partnership announcement with Volkswagen send shares of Ford spiking back toward its early 2018 range? It’s impossible to know for sure. But there’s a strategy that works no matter which direction F heads.

A long straddle is an options trade that involves buying both a put and a call with the same strike price and expiration date. The reason behind a trade like this simple… and plays perfectly into what is happening with Ford’s shares.

As long as the underlying stock doesn’t stay still throughout the duration of the straddle trade, one of the two options will become profitable. If shares sink, the put will go in the money and pay out. If shares rally, the call will.

The risk of this strategy is that the stock doesn’t go anywhere, making the options on both ends worthless. So, the amount one pays to enter both sides of this trade is the total amount risked.

The potential profit is limitless. This is shown in the diagram below:

longstraddle.jpg

Source: The Options Industry Council

If Ford reaches its former price levels in either direction, this trade could do extremely well. Let’s look at a specific trade.

A Specific Trade in Ford

To enter a long straddle position in Ford, you could buy the December 21 $10 call for $0.22 per share and the December 21 $10 put for $0.58. That brings the total entry price for the trade to $0.80. Since each option is worth 100 shares, that’s a cost of $80 to get into this straddle.

The risk is straightforward. That $80 plus commissions is all one would have at risk throughout this whole trade.

The potential profit, on the other hand, is unlimited. If Ford performs like it has all year – no matter which direction it goes – this should turn into some kind of profit.

The breakeven point for this particular trade to reach profitability depends on which direction the stock does move.

If shares of Ford fall from here, they need to head below $9.20 per share ($10 put strike price minus $0.80 total premiums paid) for this straddle to begin profiting.

If shares continue recovering from their recent lows, they need to surpass $10.80 ($10 call strike price plus $0.80 total premiums paid) for the trade to hit profits.

As you can see, investors are quite confused on where Ford should be trading. The news is focused too much on short-term changes and projections to keep shares stable. With this strategy, you can take advantage of that misunderstanding of Collins’ analysis of a visionary brand like Ford.

— The Option Specialist

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About the Author: The Option Specialist