Option Investor
Newsletter

New Portfolio Position: GM "Bull-Put" Spread Projected Gain = $250

HAVING TROUBLE PRINTING?
Printer friendly version
GM - General Motors $34.51

General Motors (NYSE:GM) engages in the design, manufacture, and marketing of cars and light trucks worldwide. It operates through three major segments. The Automotive segment designs, manufactures, and markets passenger cars, trucks, and locomotives, as well as related parts and accessories. The FIO segment provides a range of financial services, including consumer vehicle financing; full service leasing and fleet leasing; dealer financing; car and truck extended service contracts; residential and commercial mortgage services; vehicle and homeowners' insurance; and asset-based lending. The company's automotive-related products are marketed through retail dealers and distributors primarily in the United States, Canada, and Mexico; and through distributors and dealers overseas.

Shares of General Motors have been "on the rebound" in recent sessions as investors responded favorably to the company's plan to reduce costs and increase profits in the coming quarters. At the annual shareholders meeting Tuesday, chief executive Rick Wagoner said GM plans to terminate 25,000 union jobs in the United States by 2008 with most of the reductions coming through attrition as older workers retire. The news on Friday was even better as United Auto Workers officials agreed to discuss spiraling health-care expenses with the struggling company, thus setting the stage for GM to make some cost-cutting changes within their current contract. Although these events are hardly a panacea for GM's long list of problems, the issue appears to be establishing a (technical) base near $30 and this position offers reasonable risk versus reward for traders who believe the company's share value will eventually recover.

Fundamentals Chart Earnings Dates Analyst Ratings

PLAY (conservative - bullish/credit spread):

BUY PUT JUL-27.50 GM-SY OI=4237 ASK=$0.15
SELL PUT JUL-30.00 GM-SF OI=21361 BID=$0.35

INITIAL "NET-CREDIT" TARGET = $0.25-$0.30
POTENTIAL PROFIT (X 10 contracts @ $0.25) = $250
MARGIN REQUIREMENT (X 10 contracts) = $2250
RETURN ON INVESTMENT (max) = 11.1%
COST BASIS = $29.75

INITIAL EXIT STRATEGY:

Once the position is open, traders should place a (contingent) order to close the short ($30.00) put options if the stock price moves below $30.50 on an intraday basis. A "net-debit" order of $0.55-$0.60 to exit the entire spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.

Monthly Cash Machine Newsletter Archives