What the F is Wrong with Ford?


Ford is entering dangerously cheap territory. P/E ratio of 6, dividend ratio of over 5%, and healthy return on equity. Either someone knows something the financials are not telling us, or people are worried they can’t catch up to newer car companies and their technologies. I’ve got an idea for Ford, buy back some shares while your stock price is so cheap. I think the news of releasing the Bronco and Ranger again in the US is a great one, and there is positive news out of China of Ford starting to make EV there through a 50/50 joint venture with Zotye Auto (Chinese company), in addition to it’s existing joint venture Changan Ford. That being said, Ford’s China market is still much lower than GM’s.

I am long Ford with a few Call options expiring in June @ 11.87 / share. I still think Ford will be a better investment at the current price of 11.36 (Jan. 29, 2018) than Tesla at 341.50. Tesla has extreme leadership but I think they have over-promised at this point and due for a correction. I am also long GM which has a favorable P/E ratio of 9.44 and dividend of 3.48%. Tesla currently has no dividend and is not a profitable company.

Making Your Own Volatility Bets – Option Spreads and Straddles

A lot of talk is going on about the VIX, also known as the CBOE Volatility Index. This index will track and correspond to the market’s expectation of 30 day volatility. What does that even mean?

I can show you how to make your own volatility bet by using options for a single company. For example Ford.

Ford is one of those companies that I believe will either prove itself as relevant in the coming years or fade into obscurity.

So I can make a bet that Ford will be either go past 15 dollars or slide down past 8 dollars by January 18th, 2019. For a relatively low bet of just 32 dollars I can make a decent profit if the stock dips below

Option Spread

Ford Spread Profit Chart

Stock Price Strike Price C Strike Price P Option Cost Gain Profit
0 15 8 32.00 800 768.00
1 15 8 32.00 700 668.00
2 15 8 32.00 600 568.00
3 15 8 32.00 500 468.00
4 15 8 32.00 400 368.00
5 15 8 32.00 300 268.00
6 15 8 32.00 200 168.00
7 15 8 32.00 100 68.00
8 15 8 32.00 0 -32.00
9 15 8 32.00 0 -32.00
10 15 8 32.00 0 -32.00
11 15 8 32.00 0 -32.00
12 15 8 32.00 0 -32.00
13 15 8 32.00 0 -32.00
14 15 8 32.00 0 -32.00
15 15 8 32.00 0 -32.00
16 15 8 32.00 100 68.00
17 15 8 32.00 200 168.00
18 15 8 32.00 300 268.00
19 15 8 32.00 400 368.00
20 15 8 32.00 500 468.00
21 15 8 32.00 600 568.00
22 15 8 32.00 700 668.00
23 15 8 32.00 800 768.00
24 15 8 32.00 900 868.00

Another option strategy that makes people feel better about themselves since they will almost always get something back, but costs more, is called a “straddle”. A straddle, in this case with Tesla, is a bet that the stock price deviates from a certain point. In the figure below, a bet is being placed that the price of TESLA will deviate away from $350 per share by January 18, 2018. The price looks big, $10,765 for this particular strategy. But look below and you will see the profit loss chart shows that nears $200 or goes over $430 per share you will start making money again. This particular example I would not trade because the option prices are too high.

Option Straddle

Tesla Straddle $350 Profit Chart

Stock Price Strike Price Option Cost Gain Profit
0 350 10,765.00 35000 24,235.00
10 10,765.00 34000 23,235.00
20 10,765.00 33000 22,235.00
30 10,765.00 32000 21,235.00
40 10,765.00 31000 20,235.00
50 10,765.00 30000 19,235.00
60 10,765.00 29000 18,235.00
70 10,765.00 28000 17,235.00
80 10,765.00 27000 16,235.00
90 10,765.00 26000 15,235.00
100 10,765.00 25000 14,235.00
110 10,765.00 24000 13,235.00
120 10,765.00 23000 12,235.00
130 10,765.00 22000 11,235.00
140 10,765.00 21000 10,235.00
150 10,765.00 20000 9,235.00
160 10,765.00 19000 8,235.00
170 10,765.00 18000 7,235.00
180 10,765.00 17000 6,235.00
190 10,765.00 16000 5,235.00
200 10,765.00 15000 4,235.00
210 10,765.00 14000 3,235.00
220 10,765.00 13000 2,235.00
230 10,765.00 12000 1,235.00
240 10,765.00 11000 235.00
250 10,765.00 10000 -765.00
260 10,765.00 9000 -1,765.00
270 10,765.00 8000 -2,765.00
280 10,765.00 7000 -3,765.00
290 10,765.00 6000 -4,765.00
300 10,765.00 5000 -5,765.00
310 10,765.00 4000 -6,765.00
320 10,765.00 3000 -7,765.00
330 10,765.00 2000 -8,765.00
340 10,765.00 1000 -9,765.00
350 10,765.00 0 -10,765.00
360 10,765.00 1000 -9,765.00
370 10,765.00 2000 -8,765.00
380 10,765.00 3000 -7,765.00
390 10,765.00 4000 -6,765.00
400 10,765.00 5000 -5,765.00
410 10,765.00 6000 -4,765.00
420 10,765.00 7000 -3,765.00
430 10,765.00 8000 -2,765.00
440 10,765.00 9000 -1,765.00
450 10,765.00 10000 -765.00
460 10,765.00 11000 235.00
470 10,765.00 12000 1,235.00
480 10,765.00 13000 2,235.00
490 10,765.00 14000 3,235.00
500 10,765.00 15000 4,235.00
510 10,765.00 16000 5,235.00
520 10,765.00 17000 6,235.00
530 10,765.00 18000 7,235.00
540 10,765.00 19000 8,235.00
550 10,765.00 20000 9,235.00
560 10,765.00 21000 10,235.00
570 10,765.00 22000 11,235.00
580 10,765.00 23000 12,235.00
590 10,765.00 24000 13,235.00
600 10,765.00 25000 14,235.00
610 10,765.00 26000 15,235.00
620 10,765.00 27000 16,235.00
630 10,765.00 28000 17,235.00
640 10,765.00 29000 18,235.00
650 10,765.00 30000 19,235.00
660 10,765.00 31000 20,235.00
670 10,765.00 32000 21,235.00
680 10,765.00 33000 22,235.00
690 10,765.00 34000 23,235.00
700 10,765.00 35000 24,235.00

Someone may have told you that in Blackjack insurance is a suckers bet, but if you ever looked into the counting strategy then in certain situations you should take the insurance. Currently I am only buying and writing call options at the time of this article and not utilizing spreads or straddles and have no intention of doing so in the next week or so. While the screenshots above are using market order types I strongly suggest to always trade using the limit order type on all option trades.

 

Invest in What You Understand

I’ve talked to a lot of co-workers and relatives who have invested heavily in businesses they simply don’t understand. This is a mistake.

You don’t have to know everything there is to know about a company to invest in it, but you should have a general understanding of their products and market. Warren Buffet famously invested in Coca-Cola since 1987 and currently owns around 10% of Coke stocks. He loved this company because of its iconic name, and well known product. He found a company he knew and understood and was able to make sizable returns on his investment. Coke stocks went up from $2.45 per share in 1988 to it’s current price of $47.38, paying good dividends along the way. Walmart, Best Buy, and Kroger are all publicly listed companies that any average Joe can understand.

Walmart 5 year return: 72.5%

Best Buy 5 year return: 490.8%

Kroger 5 year return: 132.7%

If you’re a gamer you know names like Activision Blizzard, responsible for games such as World of Warcraft, Call of Duty, etc. which all have their own cult following. If you bought this company 5 years ago and held it you would return 555% on your investment. Walmart and Kroger are included as examples of companies that have stiff price competition and do not have an “economic moat” such as a company like Activision Blizzard. Best Buy has been a go-to place for electronics and has been well positioned to capture what I call the Apple Tech revolution, not having to deal with rivals that have gone under such as Circuit City and Ultimate Electronics.

Now companies that you don’t understand, stay away from! For example, “exploratory mining companies”, small no-name drug companies, and Greek shipping companies are all stock investor pitfalls that usually end up going bankrupt. This is why for all of my serious investments I make sure the company has at least a 400 million market capitalization. You can certainly play with penny stocks, but I’d never suggest putting any amount you can’t lose into them. It’s my same advise with gambling at a casino.

Now you may be asking, “I knew Circuit City and their products, but those lost money!”. You’re right! Besides knowing the business you also have to do some research on the company’s cash flow and growth. Those are outside the scope of this article, as the “secret sauce” for successful investors is largely dependant on their cash flow figures in comparison with this stocks outstanding and stock price.