Update – GM: Better In General

by CC February 20, 2019 12:02 pm • FREE ACCESS• Trade Updates

A couple of weeks ago Dan highlighted a big trade in General Motors (GM) Calls. Here’s what he had to say, from Feb 7th:

At least one trader was feeling down with it this morning, shortly before 11 am when the stock was $39, 25,000 of the March 40 calls were bought to open for 67 cents. These calls break-even in a little more than a month at $40.67, up 4.3% from the trading price, risking 1.7% of the stock price The options market suggests there is about a 33% chance of these calls being in the money on March expiration.

Unusual activity is a tricky business as you don’t know exactly who or what is on that trade and what else they may be doing a large options trade against. Plus, who’s to say they know what they are doing anymore than anyone else. But probably more than 50% of the time they can simply be seen as a directional bet and therefore could provide an opportunity to ride along. In most cases we look to alternative trades to express the same direction, and in this case Dan looked farther out with a spread for those that wanted a little long exposure in GM. Again, from Feb 7th:

If I were looking to play for the long side I might consider short dated calls of call spreads especially after the stock’s 15% gains year to date, into what might be a volatile period as it relates to headlines related to global trade. But it might make sense to elongate the time horizon to April expiration, with the stock at $38.50, the April 40 / 44 call spread costs about 80 cents, risking 2% to possibly make up to $3,20, or 8.3% of the stock price if it is $44 or higher on April expiration.

Now let’s check in on both and see how they’re doing with the stock higher. With GM now 40.10, the big printin’ buy of the March 40 calls for .67 are now worth about .85, so a nice gain of .18, especially on that volume. BUT, the calls breakeven at 40.67, another .57 higher than here, and only a few weeks until they expire. Decay is already hurting these calls and that decay will only intensify into March.

Looking at the alternative Dan highlighted, the April 40/44 call spread, originally .80, is now worth about 1.20, a gain of .40, and much more time. The breakeven on these two trades is not that different, with the April spread just .13 higher, and April expiration is a long way off.

In other words the spread with more time is doing better now, and has more time to continue to do well.