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).
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.