It isn’t likely to be life in the fast lane, but with brakes released on the price chart, shares of General Motors Company (NYSE:GM) are signaling better days ahead. But for investors wanting a safer ride in GM stock, a hedged collar strategy can get you there with its low cost insurance policy. Let me explain.
As I’ve stated in the past, I’m a fan of GM stock over the longer-term. General Motor’s solid financials, continued ability to execute and turn the auto manufacturer into a competitive innovator trumps getting too worried over on an economic cycle whose impact is far from certain — and a GM stock that’s in better position than ever to weather those type downturns.
And now there’s some nice alignment for General Motors short-term as well. Well, that is if you can get past Monday’s headline warnings the auto industry is in a post-peak sales phase and instead appreciate GM stock’s price chart for forward-looking guidance.
GM Stock Weekly Chart
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As recently as late May, General Motors was looking prone to further downside as shares broke below two converging trend-lines for a second time. The bearish price action is highlighted in yellow on the supplied weekly view of GM stock.
But as can also be seen on the price chart, bulls now appear to be back in the driver’s seat.
Over the last several weeks, GM stock has managed to reverse the bearish-looking technical situation with a hammer-like doji candle followed by a four-week long flat-and-tight base above the two resistance lines. The bullish-looking rebuttal delivered a nice confirmation signal on Monday as shares powered higher to breakout on above-average volume.
What’s next for GM? My technical outlook is the price action sets up shares for a test of the 2017’s highs of $38.55 and more optimistically, in position for the emerging uptrend to eventually re-capture late 2013’s all-time-highs of $41.85.
GM Stock Collar Strategy
Back in early May, I wrote about GM stock during its first of two technical failures. Our analysis, however, was directed at using additional price weakness for the benefit of bullish investors. It also recognized technical conditions can change course quickly. As such, I offered a flexible and very low cost modified ‘bear-to-bull’ butterfly priced for a few well-spent pennies … 5 cents to be exact.
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Now and in lieu of General Motors’ breakout and solid-looking trend confirmation — after review of General Motor’s options — a collar strategy looks attractive. Specifically and with shares of GM at $35.57, selling the August $38 call and purchasing the August $34 put in conjunction with stock for $35.80 is favored.
What’s the additional premium of 23 cents on top of buying GM stock offer bullish investors? The big advantage is knowing risk during the life of the position is set at $1.80 or 5%. That’s due to the purchased $34 put.
Given this position holds an earnings cycle in late July and the put’s insurance policy is set near the lows of GM’s flat-and-tight base of the past four weeks, the collar makes all the more sense as a good position choice.
Ultimately and with risk defined, not only are unpleasant surprises contained, but if a much larger and undesirable decline were to occur, the trader is in a much stronger position financially and mentally to decide if adjusting and accumulating shares on weakness is a worthy approach as well.
The one disadvantage to this strategy is typically lesser profits on the upside, especially if the price action is stronger than anticipated. GM stock gains are initially capped at $38 or 6% due to the out-of-the-money call having been sold to help partially finance the protective put. However, as the collar can be adjusted over time to capture larger trend profits; this strategist finds the trade-off a worthwhile proposition.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
