Options Update: General Motors Sees Spike in Put Volume Following Delphi Rumors
Shares of General Motors
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PowerRating) have risen nearly 6% today, after the company announced that demand in Asian and emerging markets was strong. The company also stated that while it will continue to invest in emerging economies, the most important priority was to turn around its North American businesses. The rebound in the shares stands in contrast to Friday’s 3.3% sell-off following news that former GM holding Delphi may not emerge from bankruptcy. According to The Wall Street Journal, GM’s financial obligation could grow by billions of dollars, even if Delphi is liquidated.
In the options pits today, put volume is trumping call volume as investors react to the latest deluge of reports from GM. More than 35,000 puts have changed hands, nearly tripling the stock’s average daily put volume. Meanwhile, roughly 27,000 calls have traded, more than doubling the daily average call volume. This activity has placed GM on our Intraday Volume Explosion List, but what caught my eye was the wealth of put volume crossing the tape at the stock’s September 10 strike.
Put Buying on GM?
Digging into the GM put volume, more than 29,000 puts calls have changed hands at the stock’s September 10 strike this morning. Open interest at this out-of-the-money option currently totals 108,476 contracts. Nearly all of the volume was concentrated in 2 large blocks of 5,000 contracts and 1,000 contracts. At 10:16 a.m. Eastern time, a block of 5,000 contracts traded at the bid price of $0.30, while another block of 1,000 contracts traded at 9:56 a.m. at the bid price of $0.30. While I will be making the case for a put sell position involving this activity, it is possible that these trades represent the closure of a previously purchased put positions on GM (i.e. buy to open activity).
For the sake of argument, let’s assume that the block of 5,000 GM September 10 puts were sold to open. Such a trade could be made on the belief that GM will hold above the 10 level by the time these front-month options expire on September 19. Running with this put-selling theme, let’s examine how the trade actually plays out. The hypothetical trader sold 5,000 GM September 10 puts for $0.30, or a total outlay $150,000 — ($0.30 * 100)*5,000 = $150,000.
Remember, in a put sell position, all a trader needs is for the underlying stock to remain above the sold strike through expiration. So, as long as GM stays above 10 through September 19, the put-sell trader keeps the premium received. That said, let’s see if the stock’s technical picture or sentiment backdrop provide any clues on the potential for GM to hold its ground for the next 3 weeks…
Getting Technical
From a technical perspective, the prospects for a GM put-sell position look somewhat encouraging. The 10 level has firmed as support during the past several months. In fact, GM has closed only 3 days below this region since mid-July. What’s more, the shares are now trading above former resistance at their 10-day and 20-day moving averages. These trendlines are currently located at 10.20 and 10.40, respectively, and could help keep a sold GM September 10 put out of the money.
However, a look at GM’s weekly chart reveals a potential hurdle for the shares. Specifically, the stock is staring up at resistance from its 10-week moving average. This trendline has ushered GM steadily lower since October 2007, and is holding the shares in check amid today’s strong rally in the overall market.
The Sentiment Drivers
Turing to the sentiment backdrop, the outlook for a GM put-sell position improves – we may even have a case for a more bullish trade like a purchased call. Currently, pessimism blankets GM, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.42 indicates that puts easily outnumber calls among near-term options. Meanwhile, more than 25% of the stock’s total float is sold short, and 7 of the 8 analysts following the shares rate them a “hold” or worse. If GM can breakout above its 10-week moving average, it could spook these bearish investors into bailing on their positions. Such an event could create an influx of buying pressure for GM, thus sending the shares sharply higher.
The Verdict?
After looking at the technical picture and sentiment indicators for GM, I see not only a case for a put-sell position on the equity, but also the potential for a long call position. Expectations are extremely low for GM at the moment, and any news from the company that runs contrary to the negative viewpoints could spur a jump in buying pressure. Granted, anyone looking to play a call position on GM will want to place the trade in the December or January 2009 series of options, as the added time premium will help mitigate any market headwinds that could affect the position. As for a September put sell, the case looks pretty solid for GM at the moment.
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