by John Kmiecik | October 9, 2012 8:45 am
There was a time when a trader or investor wouldn’t even consider implementing this bearish trade idea. It would be considered almost un-American to do so because it’s a bet against one of the biggest American companies, and why would you ever do that?
Unfortunately, however, times have changed, and so has a trader’s mind set. Now, what traders see are opportunities — and isn’t that what being an American is all about anyway?
General Motors (NYSE:GM – $24.57): Long Puts
The trade: Buy the November 25 puts for $1.19 or less.
The strategy: The long put is a strategy that can be used for a bearish outlook on a stock. The trade can profit if the stock falls and the put premium increases as the option moves farther and farther in the money (ITM). Maximum profit is almost unlimited because the stock can only fall to $0 (which is highly unlikely), and the maximum loss is $1.19 if GM finishes at or above $25 at November expiration. Breakeven is $23.81 at expiration based on a cost of $1.19.
The rationale: Everyone has heard of GM. The automaker’s struggles have been well documented, especially over the last several years. But recently it seems GM has been able to turn things around a little. U.S. vehicle sales in September were at their highest levels since early 2008. The only problem was GM missed expectations and posted flat sales measured from a year ago.
But this bearish trade idea really is derived from GM’s chart. The stock has been in an uptrend since the beginning of August, and a few weeks ago it set a six-month pivot high just above $25. The stock dropped lower, then bounced off the 200-day simple moving average and now has returned to the previous pivot area, forming a double top.
A bearish sign for the stock would be if it could trade below Friday’s low, which was $24.57. Look for a move possibly down to $24 and then $23, where the moving average resides.
As of this writing, John Kmiecik had no position in any securities mentioned here.
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