Ford Option Trading Extremely Bearish As Coronavirus Weighs On China Sales

Ford Motor Company F shares were little changed Tuesday even after U.S. President Donald Trump lifted the overall market by suggesting the U.S. is considering a payroll tax cut. Ford shares remain down 38% in the past six months as fears over a slowing global auto market and the economic impact of the coronavirus outbreak have weighed on auto stocks.

Unfortunately for Ford bulls, some large option traders are making big bets that the worst is yet to come for the stock.

The Trades

On Tuesday morning, Benzinga Pro subscribers received 16 option alerts related to unusually large trades of Ford March 27 puts with a $6 strike price. All 16 trades took place within less than 10 minutes, from around 9:47 a.m. to 9:55 a.m. Here are some of the largest:

• At 9:50 a.m. ET, a trader bought 1,063 Ford put options near the ask price at 38 cents, a $40,394 bearish bet.
• Less than a minute later, a trader bought 1,163 Ford put options near the ask price at 38.9 cents, a $45,240 bearish bet.
• At 9:54 a.m. ET, a trader bought 1,050 Ford put options near the ask price at 39.1 cents, a $41,055 bearish bet.
• At 9:55 a.m. ET, a trader bought 1,810 Ford put options near the ask price at 40.1 cents, a $72,581 bearish bet.

All together, within 10 minutes, there were 10 unusually large trades of Ford put options at or near the ask price, trades typically considered bearish. During that same period, there were three trades for Ford put options at or near the bid, trades typically considered bullish. There were also three trades of Ford put options executed near the bid-ask midpoint, trades typically considered neutral.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the relatively modest sizes of the 16 individual Ford call trades they were unlikely to be institutional hedges in this instance.

Where Are The Catalysts?

Despite concerns over the coronavirus, U.S. auto sales in the month of February appear to have been relatively strong, rising nearly 8% compared to a year ago. Unfortunately, China Passenger Car Association recently reported new car sales in China plummeted 80% in February, their largest monthly drop in history.

Last week, Bank of America analyst John Murphy reiterated his Buy rating for Ford stock, but cut his price target from $10 to $9. He said the only reassurance Ford investors have at the money is that the stock is already fully pricing in a challenging year priced under $6 per share.

“Should Ford see any progress on launches and restructuring, we believe sentiment on the stock could improve and the multiple re-inflate,” Murphy said.

Bullish sentiment among StockTwits messages mentioning Ford plummeted from a peak of 93.7% back on Dec. 18 to a near six-month low of 57.1% on Monday.

Benzinga’s Take

The good news for Ford investors is that the 16 large Ford option trades that took place within 10 minutes, while mostly bearish, were also all near-term in nature. All the contracts expire within three weeks, suggesting the large trader(s) may simply be trading near-term coronavirus volatility rather than a long-term bearish outlook for the company.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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