Shares of General Motors (GM) are up nearly 3% today, having its best one day gain in months, and trading at its highest levels since mid July. The stock is down 3% on the year, with its opening tick on January 4th still the high for the year:
What’s apparent when looking at the one year chart is that the stock has been range-bound between $28 and $33. From its 2013 highs thought the stock has been in a well defined downtrend, making a series of lower highs and lower lows, until early this year, and since made two higher lows. This chart appears to be grinding to some sort of resolution in the not so distant future:
At least one options trader is expecting the stock to remain range-bound between now and June 2017 expiration, with a similar $5 band the stock has traded in for most of 2016. When GM was trading $32.74 a trader sold to open 6,000 of the June 33 straddles (call premium plus the put premium) at $5.37. What this means is that if the stock is between $38.37 on the upside, and $27.63 on the downside, then the trader would make the difference between the 33 strike and the premium sold.
This sort of strategy could be a straight up short volatility play where the trader might look to delta hedge (buy stock as it goes higher sell stock as it goes lower) as the stock gyrates between now and June expiration closer to the short put strike, and conversely as the stock rallies closer to the short call strike. Volatility is elevated into earnings but not ridiculously high historically. Therefore this trade might just be against a long stock position in an effort to add yield to a stock that has a current 4.6% annual dividend yield. If these 6,000 straddles were sold against a long stock position of 600,000 shares, the trader would make the difference between the stock price, the strike price and premium received between $38.37 and $27.63. The home run scenario would be that the stock is at $33 on June17 expiration, the trader would receive 3 quarterly dividend of nearly 3% and then receive 16% of yield enhancement from the straddle sale. As long as the stock doesn’t make a large move one way or the other on earnings, the vol should come in and the straddle sale would see an immediate profit anywhere near the 33 strike.