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Morning Update

Yesterday US GDP data showed that the economy grew at its fasted pace since late 2011, though it remains uncertain whether this pace will continue to year end as a result of hurricane Sandy and the Fiscal Cliff. Odds of jumping off the fiscal cliff seemed to increase yesterday as President revealed that his opening demands for a deal are $1.6 trillion in tax increases, $50 billion in infrastructure spending, and the power to raise the debt limit without congressional approval. Reuters reported that the proposal was “greeted with laughter” from congressional Republican leaders and it appears it is a step back rather than a step forward in the negotiations.

On Tuesday the Durable Goods report for October showed orders were unchanged, mainly due to weakness in auto sales, airplanes, and defense. However, yesterday Ford announced that it is on track to have its best Hybrid sales month ever and increase its electrified car market share to 11%, a 5 fold increase year over year. The primary driver of this growth in the US is Ford’s new C-MAX hybrid. In October, the first full month that C-MAX hybrids were sold, Ford outsold the Toyota Prius 3,182 to 2,769 and reported that 70% of buyers were new to Ford. Ford also continues to break sales records in China due to the popularity of the Focus there. Ford has posted back-to-back record breaking Focus sales in China the past two months which has helped send wholesales up 14% year to date.

Option traders have been buying calls on the stock on the news of these record sales. Yesterday the stock jumped 2.5% higher and 2.7 calls traded for every put. The biggest trade of the day was the purchase of 8,418 January 11 calls for $0.68 with the stock at 11.40. This is a bullish bet that Ford will be above 11.68 at January expiration, or 2.5% higher.

Buying calls on the stock is the best way to play this name because of how volatile durable goods sales have been in the US and abroad. Although sales appear strong in the US and China, they are down 11% year to date in Europe as the economy continues to weaken there. Buying a call removes a lot of the downside risk of owning the stock, yet allows you to profit if the stock rallies into their January earnings announcement, which is likely to show a strong quarter.


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