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Going Short by Going Long
05/18/2009 12:00 pm EST
Michael Shulman, editor of ChangeWave Shorts, buys his first call as a way of shorting a troubled automaker. When you read it, you’ll understand.
I know we call this service ChangeWave Shorts, but first and foremost we're about making money. [Today,] technicians are pretty much split about where (and when) the market is going. My research tells me that while the short term remains bullish, the longer-term trend is still decidedly bearish.
I've wanted to short General Motors (NYSE: GM) for some time, but the puts have been priced to bankruptcy for some time. So, a better way to make money from the plethora of troubles at GM is to buy calls—only we'll buy them on Ford Motor (NYSE: F).
Calls are simply a bullish option where you're expecting the price of the stock to go up. When you buy a contract, you're giving the buyer the right, but not the obligation, to buy or enter into a long futures position.
Ford the company and Ford the stock [are] on a major roll.
It's due, in part, to the rally, but the company is also showing the way for the American automobile manufacturers, based on the company's real business progress.
Yes, Ford is losing money, but it hasn't taken any government funds. On the other hand, Chrysler and GM are hemorrhaging market share while they suck up tax dollars. The failings of GM and Chrysler mean that Ford is gaining share and will probably surpass GM, once that dying dog sheds some of its worst brands.
Finally, Ford's stock has outperformed the market, even during the rally, and at $6-plus Ford stock is quite likely worth another couple of dollars, before it could hit a ceiling somewhere in the vicinity of $8.
The introduction of the new Taurus comes at the end of May, and the car is already getting great reviews. More important, a GM bankruptcy happening on or about June 1st is now a better-than-even-money possibility, according to auto industry analysts.
If GM escapes bankruptcy, Ford shares may take a hit. That's one risk, although I think fairly small. The other risk is that, while Ford has traded much better than the market, it could stall or slide hard if the market takes a major and/or abrupt turn south.
We'll dip our toe in the water with our first call option and buy the Ford Motor June $6 calls (FFI) under 83 cents. (The stock closed near $5.50 Friday, while the call options traded at 38 cents—Editor.)
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