“Global” Motors is back on the trading block

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General Motors has positioned itself as a truly global enterprise since its return to the public equity markets a few weeks ago. Options activity has been brisk.

Auto sales are showing strength around the world and the United States in particular continues to see slow steady expansion in domestic manufacturing. As such, the analysts at the  Stutland Volatility Group  currently think GM might be ripe for a buy/write strategy — normally used when an investor believes a stock will rise in price before the associated options expire

For example, an investor could buy 100 shares of GM for $34.70 — roughly the current market price — and sell 1 February 36 call for $1.65 per share. This trade would allow the call writer to immediately collect a $1.65 cash premium (an immediate 4.75% return). Then, if the stock closes above $36 at the February expiration, the investor would get called away on the position with a total return of $2.95 or 8.5%.

Considering that simply buying and holding the underlying shares would earn the same investor only a 3.70% return for selling at $36, the benefits are obvious.

This trade would also lower your breakeven point on the trade to $33.05 ($34.70 minus the $1.65 in cash you recover from writing the call), and actually get you long the stock at the IPO price.

 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options , Stocks , International

Referenced Stocks: GM

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