A little over 2 weeks ago we placed a bearish trade in General Motors (GM), fading its recent strength and targeting a 50% retracement of the move back from the rally that started in October. We’ve gotten some of that move and with the stock now 33.50 we have a profitable trade. Here was the original trade:
*Trade Idea GM ($36) Buy Jan 36/33/30 Put Butterfly for 67 cents
-Buy to open 1 Jan 36 put for 1.30
-Sell to open 2 Jan 33 puts at .38 each, or .76 total
-Buy to open 1 Jan 30 put for .13
With the stock at 33.70 this trade is worth about 1.25 mark to market, so nearly a double. But intrinsically it is worth 2.30 with the potential up to 3.00. So what do we do now?
Therefore we’d like to be patient with this trade, particularly with Holiday shortened trading weeks coming up. Ideally we’d see the stock continue in this range or even lower towards 33 over the next few weeks. We may look to close it close to the end of December if we do see that. On the defensive front. We need to be careful of any significant turn in the broader market to the upside over the next few weeks. We’ll keep a mental stop if the stock breaks back above its 200 day moving average just north of $34. The position is about -18 deltas here so a move higher will affect profits.
The theta on the position (what it collects while it’s still in the money) is about 2c a day. That will pick up over the Holidays and could also benefit from implied vols coming in. Obviously a move lower to $33 over the next few weeks is ideal and if that were to occur we’d likely take our profits which at that point would be a double or even more.