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Checking an Automotive Stock's Options Action

The options market sees a 4% move on this company's earnings report.
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Ahead of Thursday morning's earnings report from Action Alerts PLUS holding Ford Motor, we offer the following take on an option strategy for the stock from Dan Nathan, a fellow CNBC TV contributor and a regular panelist on "Fast Money" and "Options Action."

Ford Motor (F) will report its third-quarter earnings on Thursday before the open. The options market is implying about a 4% one-day move, which is above the four-quarter average of about 3.75% and the eight-quarter average of about 3.5%.

Sentiment: Wall Street analysts are somewhat positive on the stock, which has 13 Buys, nine Holds and two Sells. The average 12-month price target is around $19.20. Ford has been a major outperformer in the past year, up almost 75% in that time.

Options open interest: Open interest is skewed to calls over puts by a ratio of almost 1.5 to 1. Recent options activity has also been skewed to calls; the one- month call-to-put ratio is around 2 to 1. The Jan14 15 calls have by far the most open interest of any strike, with 170,000 of open interest. The Jan15 15 calls and the Jan14 12 puts also have nearly 100,000 of open interest.

Price action / technicals: Ford has been a stellar stock over the past year, building a steady uptrend of higher highs and higher lows. It has run into a bit of resistance near the stock's highs from January 2011, when the stock could not make it above the $18-$19 area:

View a daily chart of Ford Motor

The stock's pause over the past three months in the $17-$18 area makes sense on the basis of that long-term chart, but bulls should be encouraged that the stock has continued to make higher lows on each spate of selling pressure. The rising 200-day moving average shown in black is currently around $15 and steadily rising. The crucial support for Ford in the near term is around $16, and the $19 level is key resistance on the upside.

Volatility: Implied volatility in November is about 25 (red line below), which historically is not that high. Much of that is due to the lack of realized volatility in the stock lately, which has taken a nose dive into the mid-teens recently (blue line below):

Ford Motor, implied volatility

November and December implied volatility should fall closer to 20 after the event.

Our view: Ford is a Two-rated stock in the Actions Alert Plus portfolio, where it has produced a 14% gain. Speaking to Stephanie regarding the company's upcoming third-quarter results, she seems very comfortable with the operational results. Ford fairly easily outperformed September sales expectations, and Jim and Stephanie see improving conditions in North America, Europe stabilizing and an attractive opportunity to gain market share in China.

Stephanie's biggest worry about the stock at 52-week highs is the potential surprise announcement that CEO Alan Mulally could be leaving to replace outgoing Microsoft CEO Steve Ballmer -- this has been widely rumored. Mulally has been given a lot of credit for the turnaround at Ford over the last few years, but despite what Stephanie says is a very deep bench at Ford, the stock would most definitely sell off, possibly below $16.

We will take another look in the hours prior to tomorrow's close and look for ways to hedge in the event of a surprise announcement of a leadership change, as the Action Alerts PLUS team views this is the main risk to the stock at current levels (aside from general market risk).

Regards,

Dan Nathan, Stephanie Link and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long F.