Is it time to back up the truck in General Motors Company (NYSE:GM)? Not so fast. Based on what’s happening off and on the GM stock chart, it’s a better time to curb your enthusiasm with a low and limited-risk modified “bear-to-bull” butterfly spread. Let me explain.
Personally, I’m a fan of GM stock over the longer-term. The company has solid management behind the wheel that has done a terrific job of turning General Motors into a product innovator, as well as a much more competitive force within the auto industry.
General Motors shareholders have to also be pleased with the company’s current financial position.
In early April, the company provided investors with upwardly revised full-year profit guidance. And just last week General Motors reaffirmed some of that earnings torque as it delivered both a top- and bottom-line beat for Q1.
But sometimes you simply have to call a dog a dog. And for this Dow Jones constituent, shares are rolling over as bearish traders pile into GM following weak April sales data which appears to confirm the ominous narrative of peak auto sales having begun.
As this relates to investors’ own bottom-lines, it doesn’t look like a good spot to back up the truck on GM stock’s longer-term prospects or today’s seemingly attractive and discounted price multiple that even pays investors a nice and still-secure 4.4% dividend.
General Motors Stock Weekly Chart
Back in latter half of 2016 and into the first couple months of 2017, GM stock was finally looking ready to move higher. Our own analysis in February thought as much, though we weren’t looking for turbo-boosted gains and offered investors a low-cost, bullish butterfly as a way to test-drive shares.
Unfortunately, already weakening GM price action has taken a clear turn for the worse in Tuesday’s session. Technical supports ranging from the 200-day and 200-week simple moving averages, a 50% Fibonacci level and last month’s critical pivot low stationed at converging trend-lines have all been broken.
What’s next for GM stock?
I believe the severe amount of damage done, though still modest when looking at the provided weekly view, is worth steering clear of as it portends lower prices ahead. However, that’s not to say investors can’t position today for the opportunity to buy more solid levels in GM stock.
GM Stock Modified Bear-to-Bull Butterfly Strategy
For traders in agreement, it’s a bit too risky right now to buy GM stock, but if you like the idea of owning shares at a deeper discount where there could be some actual blood on the streets, a modified June $32/$31/$29 put butterfly may be of interest.
With GM stock at $33.20 this spread costs just 5 cents to establish. What does that get you? If shares stay above $32, this butterfly will go out worthless. But if GM stock somehow manages to right itself technically to the point where the trader wishes to become an investor, the miniscule 0.02% cost, is in our estimation, a few well-spent pennies.
On the downside, the sweet spot is the sold middle $31 strike. If GM stock parks itself there at expiration, the spread could be closed for a profit of nearly 95 cents. At that point, the $32/$31 bear put spread expands to $1, while the $31/$29 bull vertical goes out worthless.
If GM stock were to see a more sizable move lower, the spread’s expiration break-even at $30.05 is nearly 9.5% below current prices. And if it gets even uglier?
Below $29 and this trader’s max risk is set at $1.05. That could mean a loss to some. For value investors though, the ability to pick up shares at a huge discount with controlled risk in the event of a larger crash in GM stock is the other, more attractive option to consider.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s 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.
