Earlier this morning GM was up nearly 4% on media reports that Kyle Bass, hedge fund manager who runs Hayman Capital in Dallas Texas took a stake in the automaker as he sees “at least 40% increase in the share price over the next 12 – 18 months”. Per the Hayman Capital presentation posted on HVST.com today:
Now none of the last bit is new news to anyone, and one of the main reasons the stock has been rising despite the U.S. Treasury selling shares over the course of 2013, many investors are looking for a similar sort of move that AIG had once the the Treasury exited its stake late last year (AIG is up 38.5% ytd). Hayman Capital sees the following catalysts for the shares to help realize their expected 40% plus gains over the next 12-18 months:
Taking a quick look at the technical set up (3 yr chart below), the stock has reached the prior high from earlier 2011, shortly after the company exited bankruptcy and came to the public market.
While we are not usually ones to chase the whales so to speak, I think there is a very strong likelihood that we see a breakout to new highs once the U.S. Govt is out of the way and investors start to focus on the catalysts that Hayman Capital has laid out. We are not inclined to buy the stock here, but we are interested in playing with defined risk in the form of a call calendar that takes advantage of selling some premium above the 2013 highs to finance the purchase of a longer dated call for 2014.
TRADE – GM ($38.75) Bought the Dec/March’14 40 call calendar for 1.60
– Sold 1 Dec 40 call at 0.50
– Bought 1 March’14 for 2.10
Break-even on Dec Expiration:
-Profits are maximized at 40 on Dec expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is $1.60
This is a bullish structure that takes advantage of the 2013 high as a potential near term resistance and once expired allows for flexibility out until March expiration. Ideally we’d like to see GM stock go sideways or slightly higher into Dec expiration and collect that premium and then have options to possibly continue to spread the March call.