General Motors Company (NYSE:GM) experienced a brag-worthy breakout last month sending the auto manufacturer to new heights. Everything about the surge was noteworthy, from the enormous volume to the magnitude of the ascent.
And now, thanks to Goldman Sachs Group Inc (NYSE:GS), GM stock is providing an excellent pullback setup for would-be buyers afraid to chase at last week’s lofty heights.
The Oct 30th downgrade by Goldman sped up the retreat. And while the selling may continue for a few days yet, numerous potential support levels looming beneath have me eyeing this pullback with interest.
Downgrade or not, the profit-taking striking GM shares shouldn’t be too surprising. The stock was up some 31% over the previous two months with nary a whiff of selling.
Currently, the 50-day moving average rests at $41 and is a logical level for buyers to emerge – if we even drop that far. And then, below that there’s the major resistance zone around $39 that should morph into significant support.
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The large level of participation during the recent breakout confirms institutions were piling in with aggression. And that leads me to believe they will be willing buyers during the current dip – at least before too much damage is done.
Sell GM Puts for Profits
The further GM shares fall from here the more confident I am that a snap-back will materialize. So we’ll use a strategy that gets us longer the stock the lower it goes. A naked put should do the trick. Sell the Dec $40 put for 55 cents. The initial margin requirement is around $580 so if you end up capturing the profit of $55 it will be approximately a 10% return on investment.
The worst case scenario occurs if GM falls below $40 by expiration. In that case, you will have to buy the stock for a cost basis of $39.50. Based on the hefty amount of support in that area I think it’s a great price to initiate exposure.
As of this writing, Tyler Craig held bull positions in GM. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
