Twelve days ago, we had the much-anticipated initial public offering (IPO) of General Motors (NYSE:GM). Monday of this week, options on the Detroit-based automaker were (again) listed for trading.
One might have thought that the new GM options would trade with a higher implied volatility than its competitor Ford Motor (NYSE:F), which is free of any government assistance and in the hands of the public. One would, however, be wrong.
On Tuesday afternoon, we noticed on the desk that the January at-the-money straddle (long call and long put) in GM was trading for about $3.05. With the stock priced at $34.22, that is approximately 8.9% of strike. The implied vol is calculated to be roughly 30% (on both the 35-strike call and put).
Compare that with the January at-the-money Ford straddle. The 16-strike straddle is currently priced at $1.80 with the stock trading at $15.90. That's 11.3% of spot price, with implied volatility currently at 37%.
In other words, the options market (which is really just the traders and market makers in control of it) think GM is likely to move in an 8.9% range (in either direction) between now and January expiration in 52 days. Ford, on the other hand, has the imagined potential to swing 11.3% during the same time frame. This translates to a range in GM from $31.17 to $37.27 and a range in Ford from $14.10 to $17.70.
When I look at the historical volatility, GM obviously has a brief history of a dozen trading days. Nevertheless, the stock's 10-day actual vol has been 27.3%. Ford has a 10-day historical volatility reading of 29.3%. The historical reading is higher, sure, but not seven points higher as the current implied volatility readings suggest. (Note the volatility charting tool on OptionsHouse provides short- and long-term implied volatility, as well as historical volatility data).
Why the discount in implied vol terms for General Motors vs. Ford? It's really anyone's guess but it could be due to the fact that the government still owns a big chunk of GM and that could put a lid on any significant appreciation in the shares.
Ford shares, on the other hand, have no public ownership looking to sell. In fact, the 25-delta calls in Ford command a 36.5% vol compared to a 27% vol for GM. Instead of a seven-point premium, Ford has a 9.5 vol point premium in the out-of-the-money calls. Higher vols do not necessarily indicate direction, only movement. The option’s market expectation for movement in Ford is definitely higher than that of General Motors.
One possible explanation for this is a huge benefit of the bankruptcy process that GM went through is that they now have much less debt than Ford. Because Ford is a more highly levered company there is implicitly more risk to the equity. To me this is the most compelling reason for the volatility spread between the two companies.
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