General Motors Company: Join the Bears and Short GM Stock

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gm stock - General Motors Company: Join the Bears and Short GM Stock

General Motors Company (GM) has recovered nicely off the August lows, partly fueled by the general market rally but more recently by GM’s own earnings report. Investors reacted positively to the report, taking GM stock price close to the 2015 highs. Now traders are tempted to chase the stock even higher from here.

General Motors gm stock gm earningsI am skeptical of higher highs, however, as I’ve seen it fail at these level several time over a decade. So I want to short GM stock using the options markets.

For guidance, I dissected the options markets’ open interest. I found that for the next few months, current options setups suggest to me that downward is the easier path for GM’s stock price from these levels.

An easy way to short a stock is to buy put options. The money I spend to open the trade is my maximum risk. Profits would materialize if GM stock falls towards the puts purchased within the allotted time. The faster and the deeper the fall, the bigger the profits.

Using put spreads instead of buying naked puts would reduce the money at risk but in exchange, they also limit the maximum gains.

Ways to Short GM Stock

With GM stock at $35.70 as of this writing, I can short General Motors by purchasing the Nov 2015 $34 puts for 15 cents per contract. If GM falls to $34 per share or lower within the next 11 days I stand to profit. I stand to lose my entire purchase price if GM goes nowhere or higher for the next 11 days.

Eleven days can pass quickly, so if I think I might need more time to be proven right, I can instead buy the Dec 2015 $34 strike put. This would give me 40 days to be correct with my thesis. For this extended time I pay an extra 45 cents per contract. This richer entry point is a compromise I am willing to make especially since the equity bulls have recently had the momentum. Using the Dec puts would increase my max risk from 15 to 60 cents per contract.

In either of these two cases, I don’t need General Motors to reach my strike price. Both trades would increase in value if GM stock price falls towards my strike price. To book my profit, I reverse the process and sell my puts. The difference between my purchase and sale price is my profit. I personally don’t mind paying up the extra premium for the extended time on the trade because my thesis needs GM stock price to fall more than 4% in a short period of time.

Although I prefer the simple entry points as they make for simple exit points, I do need to mention that there are other ways to skew time in my favor using options strategies.

A put calendar spread is a popular strategy among option traders. It works well when I expect prices to fall but not immediately. I would purchase my longer-dated put in anticipation of the fall, but I also would sell a shorter-dated put against it to reduce my overall entry price. In GM’s case, to lower my $34 Dec put entry cost, I can sell the Nov $34 put against it. Ideally, I would want GM to fall but stop short of $34 in the next 11 days, allowing the Nov put to expire worthless. This would leave me long the Dec put that I would then own at a discount.

There are drawbacks to these strategies as they have an air of threading needles. At times — especially during times of fast-moving prices — premiums explode, making it difficult to monetize the trade even if GM moves my way.

GM stock price
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Technically, GM’s stock price has been at these levels several times in the past decade and has failed almost every time. Yes, this time could be different, but I like my odds at a short from here. Working against my thesis is the fact that GM stock shrugged off a recent retest of the $34.50 area at the end of October. This bounce could be the start of a sharp rise higher in GM if they can add another 50 to 60 cents from here.

But after these sharp rises, I like my chances and I especially like that the downside is limited to the premiums I pay for the trade.

As of this writing, Nicolas Chahine did not hold a position in any of the aforementioned securities.

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Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/general-motors-company-join-the-bears-and-short-gm-stock/.

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