Stock Play of the Day Episode 81: Trading an Electric Rally in Ford (NYSE: F)
- [Narrator] Stock Play of the Day is an educational program. Any statements made by Ally Invest employees are not intended to be, or should be considered investment advice or recommendation to buy, sell, or hold a security, or a recommendation to adopt an investment strategy. - Hello and welcome to the Stock Play of the Day. Today's stock is Ford. We'll discuss should we pass, or should we play? Hello, I'm Brian Overby, Senior Options Analyst with Ally Invest.
- And I'm Callie Cox, Senior Investment Strategist for Ally Invest. - All right, Callie. Now, before I pass it to you to talk a little bit about what's going on in the market. So, let's look at the charts, 'cause we did have a month end.
We got through September begrudgingly and now we're in October. So, I do like to look at what has happened on a monthly basis, but let's start by looking at just the daily chart in the S&P 500 index. So now one of the things that's been nice about the S&P 500 index, if you look at the moving averages. And I've added a 100 day moving average here, I meant to make it blue, but I didn't, I guess I made it green. But what we see here is we have the 20 day, the 50 day, the 100 day and the 200 day.
And if you go all the way back, even all the way back to the downturn that was caused by the pandemic, ever since we've basically broken to the upside and had a bull market, these have all stayed in line. They've all played well together. The sign of a real strong market is that all the moving averages line up. The 20 day is above the 50 day, which is above the 100 day, which is above the 200 day.
Now, we've had what's called a death cross recently. And I don't really like that term overall. In my mind, a death cross is moreso when a 20 day moves through a 200 day, but they use the term a lot. They use it loosely. And we see here that just recently we had the 20 day, which is the green line here, I guess, I got to put my mouse over here to show you that, move, cross through the 50 day.
When that did happen, we did also break out of a channel. A lot of different things happen. I have the 100 day moving average in here just as a little point because we've kind of congested in that area, on that 100 day. And actually one of our big down days that started this, came all the way down, hit that 100 day, and then we had that move back up.
Now, we've had a break down. So we had a move up back into the channel, and now we've broken down and failed, which is a more bearish sign than obviously breaking out of the channel, the fact that it tried to get back and broke away. So, I think the 200 day is in play relative just from looking at the chart, where if we stayed down any longer here below that 100 day moving average, this little area right in here, we've seen where that channel started.
There's some congestion where the market had a tough time breaking out, and that's kind of where we're sitting right now. Then the 4,100 level comes into play, which is right down around the 200 day moving average. I would expect the 200 day moving average to be a stronger support on the downside. I would hope that it would be overall. So, that would be an area that is in play.
Now, we still see the VIX index. I'm going to talk a little bit more about that, being elevated up above that 20 level, which is also a little bit concerning. But now I want to talk about the NASDAQ, because the same concept of the NASDAQ, it just hasn't played as well as the S&P 500 index overall. 'Cause if we look at this, we see the 200 day, we have the 100 day, we have the 50 day, and we have the 20 day moving average overall. And they just haven't lined up as much. And once again, we see that little death cross that has happened.
And now we've had a little bit more of a downturn in the NASDAQ, which has had a great run up over the last year, just in general. So, now we're paying it back a little bit. And one thing that I think is more interesting about the NASDAQ or the NDX index, if you will, is this is a monthly chart. So, I'm going to highlight that this is going back five years in time.
We're looking at a one month chart. And I just draw a simple trend line here that was providing some support for the market overall. So, this going all the way back to March 23rd, we see that the marketplace, basically, this is the bounce up from the lows, from the big downturn. And, if we just draw a simple trend line, we see that this was a channel that we talked about and we showed it on our daily graph. We obviously broke through that, but we also had real strong months.
Look at all the green candles here. Now, realize this was a one month candle. This consumes approximately 30 days. Green, green, green, green, green, green, green, green, green, green, and boom.
Now, we've broken on down and broken below that channel, that upward market, and we've done it handedly in the NASDAQ. So, the NASDAQ is a little bit more scary than the S&P 500 index, but overall we're seeing weakness in the marketplace. So, a little long-winded Callie, but what do we see on your end going into this week's market? - You know, Brian, I think you've covered all the interesting stuff.
I mean, this really is a technically driven market. Although we are trying to digest a lot of headlines, which I'll kind of go into because that's what strategists watch these days, you know? So, as everybody probably knows, if you've looked at stock market today, the S&P is up pretty big today after an equally like rough day yesterday. I believe the S&P is a little bit above 1% in gains today.
And tech stocks led us lower yesterday, are leading us higher today. So, it's a tech stocks market, apparently. You know, put it all together.
It seems like investors are really starting to get worried about the path of the debt ceiling debate and other markets are starting to react as well. And that's where yields come in and then yields, you know, kind of weighing on those growth stocks, like those tech stocks and the tech stock sell-off we've seen. You know, the one month treasury bill yield.
It's not something we regularly watch, but in times of panic, in times of short-term fear, we like to see how much investors are rushing into those super short-term government bonds, or not government bonds, government bills, sorry about that. But yeah, the one month treasury bill yield rose the most in 18 months yesterday, which definitely made us think that investors are kind of preparing for something on the horizon, some kind of trouble. Plus oil is on the move again. The 10 year has been pretty volatile and all of that's reminded investors of high inflation and cost pressures.
Things just feel a little out of control these days, a little more out of control than they usually are. And right in front of us is the debt ceiling debate as well. I mean, October 18th is staring us in the face and we're seeing headlines everyday about how Congress is negotiating over the debt ceiling debate or what to do with the debt ceiling. So, you know, we think investors are preparing for some volatility around that, but that's not the only worry on the horizon, right? You know, the Fed is also planning to taper. It's hinted strongly that it wants to taper within the next few months.
So, investors have that in the back of their minds and they're saying, you know, "Whoa, this feels a little too out of control, "especially for the Fed, to want to go ahead "and start these tapering plans." Not a for sure thing, but that's something that they've definitely bounced around. So, we're dealing with a market that desperately wants to go lower and is really trading on technicals right now. And that has also been a good thing. I mean, we've seen dip buyers swoop in at these technical levels, like 4,300 on the S&P, that's where they came in yesterday.
And the 100 day moving average, which I think is acting as support today. And Brian can definitely tell you that 'cause he's the tech guru. But, you know, put it all together. And in this environment, it's really, really hard to stay in completely in either the bullish or the bearish camp, at least in the short term. Things are moving quickly in both directions and while this could be the beginning of a bigger pullback, it could just as easily point to another rotation in sector leadership that's causing some temporary bumps. You know, the trade-off we've seen between tech and cyclicals and back to tech again, that could be going back to cyclicals, and that could be a very legitimate future for the market.
You don't want to be caught offside for that. So, you know, if you're investing on a short-term timeline, it's probably not too comfortable right now, but don't get too complacent and as always have a plan for your portfolio. Diversify, get some exposure to parts of the market that you don't normally have.
Just really don't try to put your stake in one side of the land. You know, we read a little bit about this. Lindsey actually sent out a volatility alert yesterday about the rough day in the stock market. So, if you're an Ally Invest customer, definitely check that out, it's in your email. And I'll promo too that Lindsey did write a quarterly outlook that really digs into all of these details that investors are thinking a lot about these days.
We published it last week. It's very good. It's very in-depth. I will drop it in the chat in just a minute after I finish my spiel, but definitely check that out as well. I mean, we're thinking about this stuff all the time and we definitely have insights more on the tactical side too. So, let's think about this week.
I mean the debt ceiling again is front and center. That seems to be what investors are worried about most. We have those moves in other markets that investors are kind of side-eyeing, saying, "You know, what am I missing? "What is the stock market missing?" That's definitely going on as well.
We have the September jobs report coming out on Friday. That's the main economic focus for this week. You know, honestly, I don't think that's going to get much attention this week. It's a very important report, can definitely show us the trajectory. Can't talk today.
The trajectory of the economy and you know, what exactly, how the economy is reacting to Delta and what economy the Fed might be working with if it does taper. So, it's a report we're going to be watching, but it may not cause as much market action. You know, it could calm some nerves here and there, or it could rattle some nerves of course if it comes in possibly lower than expected. But, I think all eyes are on the debt ceiling debate right now. And I'll add too, third quarter earnings season does kick off next week with the banks.
So, definitely watch for that as well. It'll probably be a rockier season. Growth expectations are falling and managements, since this is third quarter earning season, the last one of 2021, we're gonna see management come to the mic and really talk about what's going to happen next year.
So, investors are really going to have to judge and read between the lines. We might see some swings around that. So, I say all that to say this. The daily headlines seem to be dominating the market, but there are fundamental changes happening underneath the surface. And we're getting clues and signals about those every day. So, keep those in mind as well, earnings and economic growth.
While expectations have come down, they still look pretty decent for the next few years. So, keep that in mind, especially if you're a longer term investor. The overall trend seems to still be in place. So Brian, that's what I'm watching.
And I know you're watching a lot in the tech world of course, and in the volatility world. So, tell us what you're seeing in the VIX. - All right. So yes, if we look at the VIX index.
First of all, I'm going to start by focusing on the chart. This 20 level has really solidified itself. Basically the way most of the pundits that talk about the VIX overall, they highlight this 20% level on the VIX and that was established after the big downturn in the pandemic. And I have that line, that level drawn on this little chart.
So, right now it's basically been, if we're above 20% on the VIX, that's high volatility. If we're below 20%, we're low volatility. There really hasn't been a time in the marketplace where we've had such a level that has been established that is really acknowledged as far as the VIX is concerned. So, if we look at the VIX today, we have an up day in the S&P 500 index, up 1.5% as Callie mentioned.
And then the NASDAQ is actually up a little more than that, 1.86%. So, we've got the VIX down two. Now, to me, this isn't a big downturn in the VIX, to have a 1.5 % rise up in the S&P 500 index and the VIX only come down to about that 21 level today. I think that kind of shows that we're worried about that debt ceiling. Now, interesting enough, this October futures contract, these futures are tracking that VIX expiration.
October 20th is when that expiration would be. So, this is a very interesting volatility metric because it's going to expire two days after the big debt ceiling, I don't know what to call it. Do they shut down the government or not debate, I guess, overall. So, that is trading at 21% volatility, 2140. And in November and December and January, we're still up around the 22, 23, 24%.
So, the market is definitely nervous. We think it might be because of the debt ceiling debate, but overall, this nervousness and looking at the charts, means that we're just kind of teetering here trying to decide what our next step is. And we have that big news feature that we should know more about on December 19th, actually. So, with that said, we're going to talk about the one sector that has been doing fairly well.
Last week, we looked at energy and we talked about the XLE. This week, we're going to do kind of a theme that goes along with that. We're going to talk about EVs, electric vehicles, and we're going to look at Ford. So, Callie, let's talk a little bit about Ford. - [Callie] Yeah, Brian let's do it. So, today, Brian and I really wanted to talk about a stock that's bumped the yucky September trend that we've all seen in the overall market.
We always love talking stocks that are going against the grain, and today we're talking Ford. So, check this out. Since September 15th, Ford shares have risen 8.6%, which is a glaring out-performance compared to the S&P'S 4% loss over the same period. So, what the heck is going on? Well, it's pretty simple. Ford has been the beneficiary of an electric rally, or as we're going to say on Stock Play of the Day, an electric vehicle rally, or what we're going to tell you more about.
So, Ford has made a few major announcements in the past few weeks that have proven that they're pretty serious about the EV business and investors are believing in the hype. On September 16th, Ford did say it plans to double its production capacity at its electric F-Series factory, because of strong demand. Say that five times fast, by the way, it's not easy. Then Ford said it would spend about $11 billion to build battery factories for the F-Series truck as well, which is a huge stake in the future as for it, as, you know, an EV maker. So, Ford is really owning this market reputation as an old car maker betting big on EVs. Oof, lots of tongue twisters in here.
And all of this is happening at the same time the market is getting even more excited about EVs. I mean, think about this. Gas prices are rising, which boosts the case for getting an EV. Rivian has filed to go public and the infrastructure bill, while potentially being negotiated right now, we have no idea what the final bill will look like, that infrastructure bill could potentially include tax credits for EVs.
So, it's been the perfect storm for Ford stock. And I'll throw in too that if you want to get exposure to the EV market, it's been tough to get exposure in a more mature, stable company with lower PEs that are a little cheaper than the Teslas and the other companies of the world. Not saying that Tesla is overvalued, but it is higher valued than Ford and the data shows you that. So, perfect storm for Ford stock. But, this electric rally, I don't know, will it stay electrified for this long? Or for much longer? You know, it's tough to say. Ford has been doing really, really well, but the market itself is stumbling around.
And while Ford has largely been immune from the swing so far, all of this optimism might be baked in now. It's tough to tell. Wall Street analysts do like the stock. On average, analysts surveyed by Bloomberg expect it to rise another 10% in the next 12 months. But for now, there might be an opportunity to use options to take advantage of the rally while maybe staying hedged in case Ford loses its fuel.
So Brian, I want to hear what you have for us there on the option side, but before I pass it over, I'm going to remind everybody to please, please, please, drop questions in the chat because Brian and I will be answering your questions live at the end of the show today. So, give us some brain teasers. All right, Brian, show us the trade. - All right. So, as usual on the Stock Play of the Day, nothing's meant to be a recommendation.
We try to find strategies in the playbook that will fit the conditions, the pricing conditions, of the underlying stock that we're talking about and then you can apply this to your own portfolio and your own trading. We're gonna look at a covered call for today, because to be blunt, we don't talk enough about covered calls. The most popular strategy in the options trading world is to just sell a call on a stock that you owned. And hence because you own the stock, that call is considered covered as opposed to uncovered. So, in this instance, we have a lower price stock. So, it makes for very interesting, as we look at the option chain now, to trade options on.
It's a liquid market, you have a lower price stock, so just buying a call option outright is not that expensive. We still see it trading at high implied volatility, just like the rest of the marketplace. And I'm going to highlight this right now. Two things I want to highlight, I got a little bit ahead of myself here, is that earnings are going to be on the 27th. And I always like to confirm that with the option chains.
I do not want to be in a covered call going into earnings. So, that does affect the strategy a little bit here in that if by confirming that that date that we want to make sure the options marketplace agrees, all we do is we look at the money, implied volatility for the the expiration before that earnings, which is the 22nd, and we see that's trading at 35% implied volatility. And then we're going to go out and look at the 29th expiration, two days after the earnings announcement and we see that's trading at 41%. So, we're talking about a 6% skew in implied volatility, or somebody might say tilt overall.
But with that said, that shows us that yeah, the marketplace thinks that there's going to be an event between these two expiration dates. So, I don't really want to sell a call that would expire after earnings. Because on a covered call position, if I go back to the options playbook, we're limiting our upside. So, if the earnings is good, we're saying, well, we'll just take a little bit of it. But if the earnings is bad, we have substantial downside, because we own the stock. So, I don't like being in covered call positions around earnings.
That's probably rule number one. Sometimes you might, if you're willing to sell the stock and you're looking to sell, there might be appropriate times for doing it. But, with this said in Ford, I don't think that that's a situation that I would want to be in a covered call on. So, Ford's a lower priced stock, buying a hundred shares is $1,415.
Not a bad thing to do. If you're bullish, if you want to do an EV play, maybe we just go on out and just buy that underlying stock. If you're a little bit nervous, because we've had a very volatile month in September, maybe we sell a call against it. Now, the only call that's worth selling that is not in that expiration date is going to be this 1450 strike. So, if we sell this call, it's at 14, I'm sorry, 1415 is where the underlying stock is at, I would look to sell this stock against it, which would be the 1450 call option. And I would bring in about 28 cents above and beyond any dividends that Ford may pay over that.
And Ford does pay a decent dividend and that's worth noting. The next ex-dividend date though isn't until 129. No, that doesn't look like the right date overall, but we want to make sure we know where that dividend date is at. Okay.
So, Ford does pay a decent dividend and that's just worth noting. So, now we're going to go on out and we have the underlying stock to make this a covered call. And you can enter this all as one trade inside the Ally Invest trading platform. If you don't own the stock and you want to sell the call against it, all you do is you add the stock, you add the option contract. We have it in the option strategy work bench, and you click trade. And it becomes the official paper trade of this week for the Stock Play of the Day.
So, as that ticket is loading up, it'll show you both the stock and the option contract, and you'll do it at a net debit to the account overall. Moving slow because of the Zoom meeting here. So, let me take this. I'm just going to close it. And let's look at the profit and loss graph here. Okay.
So, if we zoom in now we see that this looks a lot like the profit and loss graph that I was showing you inside the options playbook. Here's where the underlying stock is at. Here is where our maximum profit is at, from 1450 on up.
We're bringing in about 30 cents overall. Now, one way that you can approach this too, and might be a decent alternative, is to wait for the earnings. Either you can sell this call hopefully to expire before earnings. Hopefully you get a good earnings, you get a little pop up and then sell the call afterwards.
That's one way to look at this, because as Callie mentioned, we're getting into earnings season once again. And if we do that, that's not a bad approach either, but that means that you're just going to be selling a call. You're not going to be selling this as in one ticket, as a buy-write overall.
Now, here's your profit and loss graph as of today. We have 17 days remaining until that expiration date. So, if I lower this graph and I put it down to one day, you see that the green line starts to morph into the dotted line, which would be at that expiration date overall. And if you are selling covered calls on stocks that you own, one thing that you might want to check out inside the options playbook, which I'm highlighting now, is managing your positions. Rolling a covered call. Just look at how I can roll a position when my call option gets in the money to try to avoid assignment on that call option overall.
All right. So, I see a lot of questions popping up in the chat box. Callie, let's get to them. - Yeah, definitely. All right, so I want to call something out first because William Mitchell, hi, William, William made a very good point in the chat.
William said, "Ford is not paying a dividend right now," and he's right. Ford's dividend was actually discontinued. For how long? I don't know, forever.
Who knows? But yeah, that's probably why we're seeing an outdated date up there, Brian. - Right, and they did pay a good dividend. So, all right. I apologize, my bad. - That's okay.
That's okay. We're all getting through it together on a Tuesday afternoon. All right. So, I have a good question from Wayne.
So, hi Wayne, long-time caller here. He says, "hi Callie," and he says, "Brian, I'm trying to figure out my exit plan "for a short strangle I have in Twitter. "I collected $110 in credit "and if the position goes in the money against me "at what losses should I get out?" - Hmm. All right, well. A lot of people will just say a 100% loss. I mean, that's a simple thing, but when you establish the position is when you want to decide where you want to get out at.
So, if my maximum is 110, a simple thing to do is to say, if I can buy it back and close it out for 220, meaning that I would lose that 100% that I could have gained, that's one way to manage that position. But now a short strangle in Twitter, that's kind of a scary position overall, especially if you are net naked, that call option overall. So, I would definitely want to be managing my risk on a short strangle. It was a short strangle, right Callie? - [Callie] Yeah, it was a short strangle. - I want to manage my risk on that position, for sure.
So, anything over a 100% of the maximum that I can make on the short strangle is 110. Then the maximum that I'm going to try to prevent on the loss, as long as we don't get a gap opening or whatever you trade it can be, it would be about 110, about what the maximum is I could make on that trade. And then you want to apply that to every time you do a short strangle overall, and you want to try to manage your positions that way. - All right. Good, good answer, Brian. Always appreciate the in-depth answers from ya.
All right. So, I have an interesting two-parter question from Sambit Sahu. Apologies if I didn't pronounce that correctly, but hi, Sambit. Appreciate you calling in. All right.
Sambit asks, "is there a strategy that you can do "to take advantage of the temporary high volatility "around the earnings release on October 27th? "Or do you think it's already baked into "option prices and Greeks, "and we can't do anything about it?" So, that's part one. And then part two, Sambit asks, "is there a place within Ally Invest "where I can research historical prices "of a trade I'm planning, say, call spread, "to see how much it was a week before compared to now?" - I can answer number two easily. There is not. The only thing that we have is the profit and loss calculator, which I highlight on almost every Stock Play of the Day. And that's doing real-time, but you can forecast going forward.
It's kind of a what if scenario, as opposed to what happened previously. We don't have that capability. And not a lot of brokerage firms do, but there are a few out there that do that for you. And then the first question is around high volatility.
Yeah, there are trades that you can do. I prefer, especially for beginning traders, to stay away from those moments when it's known volatility overall. So, I prefer that most people ignore when there are high volatile trades. Now, the strategy, and I'm assuming that you're meaning let's try to capture the volatility premium.
One of the safer strategies overall is to maybe look at a covered call position where you just own the stock. You got the volatility of the earnings, but you're bringing in the premium above and beyond. Now, obviously you can look at a short call spread. You can look at a short put spread. You could even come out with this position.
Now in Ford, there's not a lot of premium, but let's say we were doing something like in a Tesla or something else around earnings and you could go out and sell a put saying that you're willing to buy it if the underlying comes down, and use that premium to buy a call above that marketplace. That's one way that you can approach it with high implied volatility. But, the volatility is there for a reason and that's always a concern. Now, I know a lot of people that learn the covered call strategy, and the first thing they do is say, "I want to sell that premium." And the problem with a covered call strategy though, is I want to sell that implied volatility premium, those prices are way jacked up because of the earnings, so I'm going to specifically look for that. But, if I run back to the options playbook, oh I guess I've moved it, and we look at the covered call strategy overall.
Let me get there. One of the things about a covered call is that you have unlimited downside. So, even though you're receiving, which to you you may seem to be an increased amount of premium because of their earnings, you also have to think about the risk. I'm going to do this a lot, and I'm going to win more than not. I mean, ideally that would be the situation, but the one time that I lose, I get this big gap down in the underlying stock. That usually happens on the open, and it's very hard to get out of it and minimize your loss.
So, more times than not, if you're selling covered calls around earnings, you're probably going to be profitable. But the one time you're not, it's really going to hurt. So, that's why I kind of lay down until the urge goes away when I'm looking at selling covered calls around earnings.
I just prefer to not do that, because usually that means I own the stock, I think their earnings are going to be good, 'cause I own the stock, and I want to be able to partake on the upside, and a covered call just doesn't let you do that overall. So, some of the strategies is in the playbook, you can check them out. Short call spread, short put spread, anything where I'm just selling some premium overall. But the one trade that I do kind of look at if I'm not opposed to buying the stock, is to sell a put saying I'd buy the stock if it went lower, and buy a call in case it does skyrocket higher. - All right. All right.
That was awesome. I think I learned a thing or two from that. Okay, everybody.
It's 12:31. That means we need to wrap things up. Oh, I'm going to take one more because one good one just popped in. BobNJ75 asks, "silly question."
Not a silly question, no silly questions. "But where is the options playbook on the Ally website?" So, tell us the URL. - Well, it's actually as simple as it gets, optionsplaybook.com. If you go inside the Ally website, there's certain places within the community where the strategies are gonna pop up, but we've always kept it as a separate site.
That makes it very simple for you. Optionsplaybook.com. - Yep. There you go. Not a silly question. All right, guys, we're going to wrap this up for now.
We'll see if we can answer some of the questions in next week's episode, but thank you for joining us. We loved talking Ford with you. I want to remind everybody that Brian does an overtime show. Revisiting the trade, how to adjust it, how's it going, every Friday at 12:00 pm Eastern, right here on Ally's YouTube channel. And he'll be doing it this Friday, so check it out. - All right.
Yeah, definitely. And please click subscribe, ring the bell. See me this Friday. We'll talk about it on the overtime edition, and then you'll get all of the alerts for all the Stock Plays of the Day.
And thanks for coming everyone.