Investors should buy bullish General Motors Co. options while selling similar contracts on Ford Motor Co. because GM is poised to outperform its rival, JPMorgan Chase & Co. said.
Equity derivatives strategists Adam Rudd and Marko Kolanovic recommended buying GM’s March $38 calls and selling Ford’s March $17 calls in a strategy they termed a “call switch trade.” GM advanced 1.6 percent to $37.45 as of 2:50 p.m. in New York. Ford climbed 3 percent to $17.30.
“This option strategy would provide a positive return if the Ford share price is at or below the $17 strike at March expiry and/or if GM outperforms Ford by more than 0.6 percent,” the New York-based strategists wrote in a report today.
The strategists cited JPMorgan auto industry analyst Himanshu Patel, who initiated coverage of GM Dec. 28 with an “overweight” rating and $44 share-price forecast. GM may generate $4.3 billion in free cash flow this year before pension payments, Patel wrote Dec. 28. At that cash flow, GM could achieve its goal of wiping out debt and pension liabilities by 2013, he said. Patel rates Ford at “neutral.”
Calls give the right to buy 100 shares of a security for a certain amount, the strike price, by a set date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.
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