On December 1st we got a glimpse at a nice November auto sales print that was inline with expectations. That got us looking at General Motors which had seen a really nice rally from both the August flash crash lows as well as late September retests. Here was some of what we said at the time:
Consumers are taking advantage of aggressive promotions, relatively easy credit with the backdrop of lower fuel costs. There have been no shortage of calls that lower for longer oil prices should keep pricing aggressive, but with the Fed ready to raise short term interest rates for the first time since June 2006, we could have hit peak auto sales for this cycle.
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We could be a fairly weird spot in our economic recovery as the Fed is about to end their crisis monetary policy in a couple weeks, albeit in a gingerly fashion. Just this morning, U.S. manufacturing saw its lowest monthly print since mid 2009, not to mention horrid results in China for November. I am hard pressed to see employment gains past a seasonally strong holiday period, more likely reverting back to its seasonal weakness in Q1.
With GM approaching the upper band of the downtrend (highlighted above), it makes for an interesting short entry, playing for a retest of the low $30s in the coming weeks, especially in the face of the FOMC rate decision.
One of the key points was that GM was already at the upper band of the downtrend, and that was in the face of the Fed’s imminent interest rate decision. To take advantage of a pull-back we placed a defined risk put butterfly targeting $33. Here was that trade:
*Trade Idea GM ($36) Buy Jan 36/33/30 Put Butterfly for 67 cents
Rationale: Risking less than 2% of the stock price to fade the recent strength, and play for a 50% re-tracement of the two month range.
With today’s broader market weakness we find GM right near our targeted strike and now have a decision. With the stock 32.90 the trade is worth 1.52. That’s a nice gain but obviously if the stock stayed near the $33 strike until January expiration it could be worth a lot more (potential of being worth $3). But the likelihood of the stock just staying here seems unlikely with how the broader market is starting off in 2016. This trade is short vol (meaning when vol rises it is worth less) and it is short gamma (meaning moves away from where it is mean’s it’s worth less).
When something is short vol and profitable you are on the first day of a big vol spike the disciplined thing to do is to take the money and run. It’s unlikely that the market will start the year off with a big move lower and then just calm down. Volatility seems like it’s back and therefore we’ll be disciplined with trades like GM that are short vol: