Investment Reflection on Ford Vertical Put Option Strategy
Overview
On June 13, 2024, I initiated a vertical put option strategy on Ford (F) $Ford(F)$ by selling a put option at a strike price of $11.82 and buying a put option at a strike price of $10.82, collecting an option premium of $26 per contract. This strategy had a maturity date of July 19, 2024. Recent developments in Ford's EV strategy played a significant role in this investment decision. On July 8, 2024, I decided to close the position by paying $2 per contract.
Rationale Behind the Strategy
The motivation behind this strategy was primarily driven by Ford's announcement regarding adjustments to its electric vehicle (EV) strategy. Ford decided to discontinue its "EV-certified" program due to declining demand and instead allowed all dealerships to sell EVs. This move was expected to double the number of dealerships eligible to sell EVs, potentially stabilizing Ford's market presence amidst slumping demand.
By selling the put at $11.82 and buying the put at $10.82, the strategy aimed to benefit from a stable or slightly rising stock price, where the premium collected would represent the maximum potential profit if the stock remained above the higher strike price by expiration.
Execution and Outcome
The trade was executed with the following specifics:
Sold Put Option: Strike Price $11.82
Bought Put Option: Strike Price $10.82
Option Premium Collected: $26 per contract
Position Closed: July 8, 2024, at $2 per contract
The closing of the position at $2 per contract on July 8 resulted in a realized gain. The strategy effectively managed to capture the majority of the premium with minimal risk exposure.
Reflection on Strategy
Market Timing: The decision to open the position on June 13 was well-timed given the imminent changes in Ford’s strategy, which likely influenced market perceptions positively. The closing of the position before expiration helped lock in profits and mitigate any unforeseen market volatility that could arise close to the expiry date.
Risk Management: By employing a vertical put spread, the downside risk was capped. The maximum loss was limited to the difference between the strike prices minus the premium collected, while the maximum profit was the premium collected.
Strategic Adjustment: Closing the position early at a minimal cost (paying $2 per contract) allowed for capturing almost the full premium collected ($26 per contract), resulting in a net gain of $24 per contract. This decision reflects a prudent approach to managing profits and reducing risk exposure.
Market Sentiment: The adjustment in Ford’s EV strategy highlighted the importance of monitoring company-specific news and market sentiment. The positive reaction to the increased accessibility for dealerships to sell EVs likely provided a supportive environment for the stock price, contributing to the success of the option strategy.
Conclusion
The vertical put option strategy on Ford was a well-executed investment, capitalizing on favorable market conditions driven by strategic changes in Ford’s EV approach. The timely opening and closing of the position demonstrated effective risk management and strategic foresight, resulting in a commendable return. This experience underscores the importance of staying informed about company developments and being agile in response to market changes.
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