Take a Bullish Chance on GM Stock

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General Motors (GM) will step into the earnings confessional before the open this Wednesday, and it appears that Wall Street has set the bar pretty low for the automaker.

general-motors-gm-stockThe lowered expectations are not surprising, given that GM stock is down some 25% this year and the company has had to recall more than 30 million vehicles so far in 2014. But the stock is short-term oversold, and General Motors has announced a long-term turnaround plan — factors that could provide jumping-off points for savvy investors.

Digging into the numbers, the consensus is targeting earnings of 98 cents per share, up from 96 cents per share a year ago, while revenue is expected to have risen 1.9% to $39.6 billion. That said, earnings estimates have been downwardly revised by more than 5% during the past three months. What’s more, expectations may be even lower, with EarningsWhisper.com reporting a third-quarter whisper number of 96 cents per share for General Motors.

Despite the lowered short-term expectations, the brokerage community has a generally favorable long-term outlook for General Motors stock. Specifically, data from Thomson/First Call indicates that analysts have doled out 12 “buys” for GM, compared to just four “holds” and three “sell” ratings. Additionally, the 12-month consensus price target of $41 represents a healthy premium of about 35% to yesterday’s close.

Options traders are also quite bullish on General Motors stock. In fact, the October/November put/call open interest ratio of 0.46 indicates that calls (or bets that GM stock will rally) more than double puts (or bets that GM will decline) in the front two months of options. Drilling down, peak call open interest totals 34,021 contracts at the weekly Oct $31.50 strike, which expires on Oct. 31, while the weekly Oct $30 strike, which expires at the end of this week, arrives at a distant second with 18,530 put contracts open.

General Motors GM stock
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Overall, implieds on weekly Oct $25 options are pricing in a potential post-earnings move of about 4.2% for General Motors stock. This places the upper bound near $31.26, while the lower bound lies at $28.74.

Technically, an upside move would fall short of overhead resistance, leaving a bit more running room for GM, while a downside move would breach key short-term support, potentially resulting in an extended selloff.

Options Trade on GM Stock

For those willing to take a chance and join the bullish crowd, a Nov $30/$32 bull call spread has possibilities. At last check, this spread was offered at 81 cents, or $81 per pair of contracts.

Breakeven lies at $30.81, while a maximum profit of $1.19, or $119 per pair of contracts, is possible if GM stock closes at or above $32 when November options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/10/general-motors-gm-stock-options/.

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