General Motors Company (GM) Stock Filled Its Potential – Short It!

Advertisement

General Motors Company (NYSE:GM) stock has had a nice July. It’s up 5% since late June. The current level was the target of a measured move off a technical breach at $34.70 per share. But from here, bulls will need to do a lot more work to continue higher. Meaning it’s into resistance and could fade back toward $35, or lower, without a new catalyst.

Today, I want to share a trade that would short GM stock for the next few weeks. Technically speaking, the current band around $36 per share has been pivotal for the past few months. So neither side is likely to give it up without a fight. A stall after a rally opens the door for a normal dip before the next upthrust.

Fundamentally, General Motors is cheap from a price-earnings basis, and I would prefer it over Ford Motor Company (NYSE:F) as an auto play. But the whole sector scares me a bit.

We’ve been debating the concept of peek auto for years. Although I don’t fear it as a single event, I do think it opens the door for headwinds to come. I also have to consider that GM stock is now benefiting from the dip in Tesla Inc (NASDAQ:TSLA).


Click to Enlarge 
Before you send out for my arrest for shorting such an American icon, consider this bullish GM trade from two weeks ago that paid me quickly.

So today’s bearish bet is merely a trade on short-term price action and not on its long-term prospects. In fact, I will leverage GM’s long-term fundamentals to implement my trade.

I don’t sell short stocks naked. I prefer using the options markets; and in this case, I will buy puts for my bearish setup. When I buy a put and the underlying stock falls, then my put appreciates in value. Therein lies the profit. But time is my enemy when I own options.

So to neutralize time, I sell longer-dated puts to completely finance those that I buy. This way, time would be fighting itself in both of my setups. Taking both trades, I’d be long and short GM at the same time. I only do this because I believe in the fundamentals of GM, so I am not afraid to own it lower in case it falls too much.

GM earnings are coming soon and this could be the catalyst to make or break this trade. It is important to note that the immediate reaction to the event is binary and independent of the quality of the report.

Traders are a fickle bunch and I’ve seen them sell down companies on great earnings reports. So there is a lot of guess work on the day of.

The Bearish Side: Buy GM stock Aug $35 put for 50 cents to open. Here I need GM to fall through my puts, and the faster the better.

The Bank (Bullish Side): Sell GM stock Nov $32 put and collect 92 cents to open. Here I have an 85% theoretical chance that the stock will stay above my sold put. Otherwise, I have to own the shares but that would be at a 13% discount from today. In addition, I would have profits from the long puts I own.

Taking both trades means that I am getting paid to be short GM. So if I am wrong and GM rallies, I still make money! Further, I can sell back the August puts, and any premium I recapture equals more profits.

Investing is risky, otherwise there would be no reward. However, never risk more than you are willing to lose.

Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/general-motors-company-gm-stock-filled-its-potential-short-it/.

©2024 InvestorPlace Media, LLC