The market gods delivered up a fat pitch to General Motors (GM) heading into this morning’s earnings report, and the automobile manufacturer knocked it out of the ball park. Shares of GM jumped 4% out of the gate after the company reported adjusted earnings of $1.50 per share. The outsized profits easily cleared analysts’ estimates of $1.18 earnings per share.
After sputtering for most of the year, GM stock finally gained traction in recent months. Since the infamous Aug stock crash, shares of GM were up 20% before today’s earnings beat. The nascent recovery has succeeded in turning both the short-term and intermediate-term trend of GM stock higher.
If today’s up-gap holds, General Motors will also have remounted the pivotal 200-day moving average for the first time since June. With most major hurdles now cleared GM stock has a decent shot at retesting its 52-week high near $39 in the coming months.
Using options, we can structure a trade to more than double our money if GM stock can make the journey.
With earnings in the rear-view mirror and a solid uptrend now established, implied volatility has dropped notably, making option premiums quite a bit cheaper than they once were. Long premium strategies are the way to go for investors looking to capitalize on additional upside in GM.
GM Call Spreads Beckon
Buy the GM Jan $34/$37 call spread for $1.25 or better. The vertical spread consists of buying to open the Jan $34 call while simultaneously selling to open the Jan $37 call to reduce the overall cost, and therefore risk, of the position. The max risk is limited to the initial $1.25 debit and will be lost if GM stock price falls below $34 by expiration.
The max reward is limited to the distance between strikes minus the initial debit, or $1.75, and will be captured if GM stock price can climb above $37 by expiration.
To fine-tune the entry, consider waiting for some type of dip in GM shares over the coming days. Some profit-taking may be in order after such a large jump. Any type of pullback in the stock will allow you to buy the recommended call spread even cheaper.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
