F is not a highly volatile stock that provides a solid dividend. These characteristics, along with a few others, provide a great opportunity to increase your income and return by writing call and put options.
Options, particularly, longer options can provide additional income and an increased return on your investment in a stock. Ford provides a great opportunity due to a number of factors. I will review how options can be utilized to produce a greater return on your investment, particularly with Ford. There are a few reasons that make Ford a great candidate to utilize long-term options and boost your return. The stock is not highly volatile. It has been relatively range bound for the past few years.
There are not drastic moves up or down. This will cause options to demand a smaller asking price, therefore, reducing your income upfront but it also means there is much less risk involved with writing the option. I do prefer writing long-term options, which also helps a lot with the volatility as a sudden fluctuation from good or bad news won't affect the stock as much in the long term.
Since I am discussing long-term option writing, the dividend is an important factor that comes into play. I would usually prefer to not write a naked option. Also, since I already own shares of Ford, I am looking to boost the return I am already getting. The dividend provides a consistent return over the time period before the option will come due. So, while I am sitting on my shares receiving my dividend, I can also write options to supplement that return. Without the dividend, I am entirely at the mercy of the market and price changes in the stock.
I do not have a massive trading account, so this is an important part of the equation. The last part that makes Ford a strong candidate is the fact that I believe the stock is trading at a low valuation.
If you have read my previous articles covering Ford, I have been a long time bull of the company but I understand that nature of the industry and the fact that it is cyclical.
The market has been predicting peak auto for years now and in so doing has pushed the valuation for Ford to the levels it is. Company management recently discussed how the auto market is plateauing.
This is not news that is just coming out. I believe the stock price of Ford already reflects the downturn in the auto industry. Even if the company's performance begins to decline, I do not think the stock will move drastically lower.
The price reflects this decline so rather than the price decline, I would expect the multiplier to slightly increase closer to historic levels of the company.
This provides a good opportunity to sell put options on the stock without fearing as much that they will be exercised. I currently own 1, shares of Ford stock. Since I have a position in the company already, I do not need to purchase any shares. If I did not own any shares, I would purchase the shares before writing any options. Below is a screen shot taken from Yahoo Finance of the calls and puts for January 18, This is partly due to the average price of the shares that I own.
It feels that this is a price at which I would be willing to sell my shares in a year and a half. This provides me some downside from the current stock price while also providing some cash upfront for writing the option. The put option is much less likely to be exercised. It also provides a point of entry at a price that I would be more willing to purchase more shares. To further weigh the chances of the options being exercised, I looked at historical prices of the last two years for Ford to see where the strike prices for both the puts and the calls fell within the chart.
As can be seen over the past two years, the stock has not crossed either strike price over the past 27 months of trading. I know the options are going forward, so future estimates are more important than historical data but it provides some perspective into the trading range that Ford has operated in.
It shows that the stock does not fluctuate greatly and provides some reassurance to my decision on the strike prices that I chose. There are multiple scenarios that could happen upon expiration of the options.
I will run through the different scenarios and the return that can come with the use of the options. The return is based upon the income from the options as well as the dividends. In Scenario 1, neither option is exercised.
Ford continues to trade in small range as it has done for some time now, and neither option has any value. In this case, the stock price of Ford could not move one penny, and you will still see a return of That is good for a return of over 10 percent per year. Scenario 2 is if the price of Ford increases dramatically over the next couple of years and your call options are triggered.
You would still receive your dividends over the time period along with initial value of the calls. The total return over the time period would be While you will miss out on future gains going forward as you will be required to sell the stock to cover the call, the The greedy gets rich but the pigs get slaughtered.
Scenario 3 is the one that can cause some worry. If the price decreases and your put option is exercised, you could be stuck holding the bag. The biggest risk with this is that there is no downside protection. This is one reason why I chose Ford to utilize option investing. I feel the risk is very low that the company will see a significant price drop. I feel that most of the downside risk is already priced into the stock. That being said, I ran a hypothetical scenario of what could happen.
That would be roughly a 23 percent drop over the time period. The stock has not seen this low of a price since July of So I feel for the stock to reach that level is unlikely. After taking into account the dividends received and income from the sale of puts and calls, you would be left with a loss of 2. This is not a significant risk on the downside. While your money could have easily made money elsewhere, the opportunity cost is probably the biggest loss here. So you would have to make sure that you have sufficient funds for this transaction.
If you feel the stock is in a free fall, then you could quickly sell and take your 2. Through the options you can lower your entry point to a place where you would be willing to buy the stock. At that price, your dividend yield on the stock would be 6. By utilizing long-term options, particularly with Ford, you can increase your income and return. It gives an investor a good opportunity to boost the return with a relatively small amount of risk. Ford is prime for the opportunity as it is not a volatile stock, it has a strong dividend, the price is right, and it is not overvalued.
While this is a great option to use with Ford, the idea can be applied to many different stocks. There are some options with options to earn a healthy return on your investment in Ford even if the price is stuck in neutral.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article. Writing call and put options on Ford can increase the income and return on investment. The characteristics of Ford make it a prime candidate to write options.
Volatility or lack thereof Dividend Price Valuation The stock is not highly volatile. Want to share your opinion on this article?
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