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3 Auto Stocks to Buy Instead of Ford, GM

Despite the economic turmoil in Europe, Avis continues to successfully expand its presence there, relying on and seeking out new partnerships. But it hardly relies on Europe for a significant portion of its business. According to the company's most recent quarterly report (via the SEC Website), approximately two-thirds of its business happens domestically. And not all of its international business comes from Europe.

I like CAR as a long-term play despite recent volatility. In these types of situations, I often write covered calls as I buy the stock. This provides income, which doubles as downside protection. You must be bullish long-term to employ this strategy. If the stock drops considerably you could be stuck with a losing trade.

Consider the following example to how covered call income offsets a decrease in the value of the stock leg of the trade.

If you purchased 100 shares of CAR at this past Friday's closing price of $15.92 per share, you're in for $1,592. You proceed with a normal, un-hedged stock trade.

If, however, you sell the CAR Nov 2012 $18 call and collect 90 cents (though I might hold out for 95 cents or $1.00 using a limit order), you lower your effective purchase price of the stock. It comes down to $15.02 because the 90 cents worth of income comes into your account as a credit. You spend $1,592 on the stock and receive $90 (options use a multiplier of 100) to sell (or write) the call. That means you're on the hook for $1,502.

You do not start to lose money on this trade until CAR breaches $15.02. That gives you some breathing room.

On the flip side, you supercharge your potential gains.

Consider a scenario where your shares get called away at $18. If you sold 100 shares of CAR, purchased for $15.92 each, at $18, you realize a 13.1% profit. Factor in the covered call income you received and that gain kicks up to approximately 19%.

While some investors consider options inherently risky, many strategies, particularly ones such as covered calls that provide a built-in hedge, actually mitigate at least some risk.

To that end, while I would buy TSLA, ZIP and CAR over F and GM in the near-term. If I had to touch F and GM I would not do it without the support of covered calls.

>Contact by Email.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication, the author held no positions in any of the stocks mentioned in this article.
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CAR $25.10 0.00%
F $13.56 0.00%
GM $31.80 0.00%
TSLA $240.76 0.00%
AAPL $93.74 0.00%


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