Morning Update

Yesterday Alcoa kicked off earnings season with a mediocre report that showed declining cash flow and a bottom line loss despite better than expected EPS and revenue. The shares are modestly lower ahead of the market open. In Europe sentiment has been negative after the IMF said that by 2013 European banks will have to dispose of up to $4.5 trillion in assets. However, there was some good news out of Italy and France, whose industrial production numbers were bother better than expected. Later today in the US wholesale inventories and the Fed’s Beige Book are set to be released, and Bundsbank president Jens Weidman is scheduled to speak, which could generate anti-ESM headlines.

Yesterday call options were unusually active in Ford, with the top trades occurring in the January calls. We saw one trader buy the Jan. 11/12.5 call spread 1,853 times for a net debit of $0.18. This was done with Ford stock trading at 10.10 and is a bullish trade betting Ford will be above 11.18 at January expiration. This means that the trade will require the stock to appreciate by 10.7% in the next 100 days to break even. The maximum profit this spread can return is $1.32, which will occur if Ford is at or above 12.5 at expiration. Since this spread only risks $0.18, it has a very favorable risk/reward ratio. The reason for yesterday’s call activity is likely the news the Ford’s sales in China have increased 1.7% year over year and 10.5% since August 2012. To capitalize on China’s growth, Ford is planning to launch 15 new vehicles in the country and double its production capacity by 2015. Ford’s strong growth in China may have caught investors by surprise due to news out of the region focusing on the slowing economy. Additionally, yesterday Ford was named a top pick by Morgan Stanley, who said the company is leveraged to the US housing recovery and a European restructuring. It appears that this trader is willing to risk a little to gain a lot in the event the global economy does better than forecasted over the next 100 days.