Since initiating this bullish calendar call spread a couple weeks ago GM shares have risen 5%, and remain almost 3% off of the recent 52 week highs made earlier this week. Investors appear excited about the U.S. Treasury’s stake in the automaker giving way to the potential for the company to reinstate a dividend and begin to buy back shares, possibly as early as the first half of 2014.
The idea of the calendar was to sell a shorter dated out of the money call to help finance the purchase of a longer dated call. Now on expiration of the short strike, and the stock a little above the strike, we are going to update the position by rolling the short strike.
Here was the original trade from Dec 4th:
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
We are going to now turn the calendar into a vertical call spread in the same expiration with the following actions:
ACTION: GM ($40.80) Buy to Close 1 Dec 40 call for .85
ACTION: GM ($40.80) Sell to Open 1 March 45 Call at .85
NEW POSITION: GM ($40.80) Long March 40/45 Call Spread for 1.60 (original price of the calendar)
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Original Post Dec 4th, 2013: New Trade $GM: Government Motors No More?
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:
[caption id="attachment_33317" align="aligncenter" width="757"]
From HVST.com per Hayman Capital presentation dated 12/4/13[/caption]
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:
[caption id="attachment_33318" align="aligncenter" width="673"]
From HVST.com per Hayman Capital presentation dated 12/4/13[/caption]
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.
[caption id="attachment_33322" align="aligncenter" width="589"]
GM 3 yr chart from Bloomberg[/caption]
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. [private]
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
Rationale:
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.