There's no way around it, trading for General Motors Company (NYSE: GM ) is going to be choppy for a while. The company put up solid third-quarter earnings figures, but October sales, while above expectations, were still lower year-over-year. Add to that an expected slowdown in the U.S. auto market heading into 2018, and you have a considerably mixed message for GM stock.
The problems begin with GM's stock price. The shares rallied sharply off their May bottom, adding nearly 30% through the past five months. This left GM stock heavily overbought heading into its late-October quarterly earnings report.
The added "weight" left GM top heavy, and while the shares attempted to rally following earnings, there just were not enough buyers left to sustain any kind of meaningful push.
As a result, profit taking set in, sending GM stock below what could have been technical support at $45. Adding to the pressure was October's auto sales figures . Though sales figures were better-than-expected from GM, largely due to strong performance from truck and SUV sales, they were still down year-over-year.
Unfortunately for GM, Ford Motor Company (NYSE: F ) saw strong year-over-year results backed by emerging demand for its refreshed lineup of F-150 trucks. The disparity between the two prompted Goldman Sachs to cut GM stock to "sell" from "neutral," with the brokerage citing slacking demand and the impact of GM's own refreshed pickup line for 2018, which could take time to get moving in terms of sales.
But the brokerage bunch isn't completely negative on GM stock. JPMorgan boosted its price target on the shares to $55 from $54 following earnings. The problem is that we have analysts diverging on their GM opinions. And there is plenty of room for more divergence.
According to Thomson/First Call, GM stock has attracted just nine "buy" ratings out of 24 total. The 12-month price target currently rests at $46.52, just 7.82% north of GM's current perch. There is clear room for upgrades and additional price-target increases here, but, given the concerns Goldman Sachs laid out, I wouldn't expect much more movement within the brokerage community.
Click to Enlarge Meanwhile, bearish sentiment is on the rise among GM short sellers. During the most recent reporting period, GM stock short interest rose by 11% to 42 million shares. Short interest now accounts for a moderate 3.24% of GM's total float, leaving ample room for additional shorts to jump on board before the bearish trade gets too flooded.
Turning to GM options, however, short sellers might not be as confident as they let on. Currently, the December put/call open interest ratio weighs in at 0.53, with calls nearly doubling puts among back-month options. Remember that short sellers will often buy calls as a hedge for their short positions, and with uncertainty in the air surrounding GM, this is likely the case.
Overall, December implieds for GM stock are pricing in a potential move of nearly 7% for the shares through the end of next month. This places the upper bound near $46 and the lower bound at about $40.
2 Trades for GM Stock
Put Sell: I'm not extremely confident in GM's ability to rally much higher at this point, but there is an overall upside bias for the stock market heading into the end of the year. Furthermore, both earnings and October sales beat analyst expectations. At the very least, GM should hold its ground for the time being, making a play on support the best course of action.
Traders looking to take advantage of GM technical support might want to consider a Dec $40 put sell position. At last check, this put was bid at 44 cents, or $44 per contract. On the upside, traders will keep the initial premium received as long as GM stock closes above $40 when December options expire. The downside is that should GM trade below $40 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $40 per share.
Call Spread: Now that GM stock has shaken off its prior overbought condition, there is the potential to resume its former rally. Despite sales dipping year-over-year and Goldman Sachs' warning, GM stock has held up remarkably well. As such, a rally bolstered by strength in the overall market could send GM shares higher.
Those looking for a riskier bull trade might want to consider a Dec $44/$45 bull call spread. At last check, this spread was offered at 32 cents, or $32 per pair of contracts. Breakeven lies at $44.32, while a maximum profit of 68 cents, or $68 per pair of contracts - a potential return of 112% - is possible if GM stock closes at or above $45 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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