Ahead of the open on Thursday, Feb. 24, Detroit darling General
Motors Co. (
) is scheduled to release its fourth-quarter and fiscal 2010
earnings results. For the fourth quarter, Wall Street is expecting
a profit of 47 cents per share, with full-year earnings seen
arriving at $2.87 per share. Concerns have mounted heading into
GM's quarterly report, especially after fellow automaker
Ford Motor Co. (
the consensus fourth-quarter estimate on Jan. 28.
In the options pits, call buying has been quite popular among
traders on the International Securities Exchange (ISE), Chicago
Board Options Exchange (
), and NASDAQ OMX PHLX (PHLX) lately, as GM's collective 10-day
call/put volume ratio arrives at 2.86. In other words, calls bought
to open have nearly tripled puts purchased during the prior two
While call buying typically denotes bullish options activity,
recent short selling activity could dampen this sentiment takeaway.
Specifically, the number of GM shares sold short spiked by 32%
during the past month. As such, some of this recent call-buying
activity on GM may be the work of short sellers hedging their
positions, and not options traders betting on a rally in the
Turning back to today's options activity, volume is once again
skewed toward the call side, with roughly 10,600 calls changing
hands, versus more than 7,000 puts. Digging deeper into GM's
options activity, I came across several blocks of puts and calls
that changed hands at the bid prices. Additional research uncovered
what appears to be a short straddle on GM using weekly options.
The Anatomy of a Weekly General Motors Short
Short straddles have apparently gained in popularity recently,
with retail concern Nordstrom Inc. (
drawing a similar trade on Friday
. While today's short straddle involves weekly options, its
construction is the same as Friday's JWN straddle. Specifically,
the trader sold 127 GM February 25 36-strike calls at 9:44 a.m.
Eastern time on the ISE for the bid price of $0.68, or $68 per
contract. At the same time, the trader also sold 127 February 25
36-strike puts for the bid price of $0.87, or $87 per contract. The
result is a net credit of $1.55, or $155 per pair of contracts.
The position reaches its maximum profit if GM closes at $36 per
share when these weekly options expire this Friday. In this
best-case scenario, both the sold February 25 36-strike calls and
puts would expire worthless, allowing the trader to retain the
entire premium collected.
There are two breakeven points for this position. They are
calculated by adding and subtracting the net credit received
to/from the sold strike. For the example, the breakevens are $37.55
-- 36 + $1.55 = $37.55 -- and $34.45 -- 36 - $1.55 = $34.45.
Finally, the maximum loss on a downside move is limited to the
strike price minus the net credit received, coming in at $34.45, or
$3,445 per pair of contracts, and is reached if GM were to drop to
zero at expiration. Meanwhile, the maximum loss on an upside move
is theoretically unlimited, as there is no limit to how high GM can
rally. Below is a chart for a rough visual representation:
The winter 2011 issue of
magazine is now available here.