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Wednesday, February 23, 2011

A quick option trade -- Ford bull spread

Frequently, there are times in the option markets where relatively low risk trades can bring extremely high returns. A good example is a trade that is currently available in Ford Motor Company options. specifically, it is a bull spread in April call options. On can buy the 12 calls for $3.05 and sell the April 14 calls for $1.39. The net investment is $1.66 for each pair of options. If the stock is above $14.00 at April expiration, you will get a net of $2.00. That is an annualized return above 120%. Since Ford is currently trading at $14.92, the stock can decline by almost 7% and you still get the maximum return. So long as Ford is above $13.64 on the April expiration date, you will earn a profit on the trade.

For a stock like Ford which has retreated from its earlier highs but which continues to demonstrate great fundamental strength, this seems like a great bet.

Obviously, options carry risks with them that the underlying stocks do not as a result of their limited time duration. Nevertheless, there is a lot of opportunity to make high returns with relatively safe investments so long as one stays on the lookout for them

Disclosure: I put on the trade described above earlier today. While I have no current plans to change these positions, I may do so if the market shifts.

1 comment:

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