General Motors Company (NYSE:GM) has been hit by two stock market corrections this year.
The first started on February 2nd when we got a hotter than expected jobs number. The fear was that wage inflation was moving too quickly and that the Fed would need to hike rates faster than anticipated.
The second was the idea of trade war between the U.S. and China, which struck GM’s core business directly. Thankfully, Monday night we got what appeared to be a conciliatory speech from President Xi and those fears have abated a bit.
Plus, GM stock seems to be recovering nicely off its recent lows.
GM Stock Chart
On the daily chart, GM stock looks like it has a sizable upside potential just in reverting to pre-dip levels. Technically, it also has the opportunity to break a descending trend line of lower highs. So headlines aside, GM stock could retest $42 per share in the next few weeks.
Fundamentally, the stock has room to get to $42 on value alone. It now sells at a 7.5 price-to-earnings ratio and a 1.5 price-to-book. This is cheap in absolute terms so it’s safe to say that GM is not bloated. So there is plenty of room for a rally especially going into earnings.
The stock has fallen 11% in the last 3 months while the S&P 500 is only down 4%. But the upside of this is that General Motors stock has been tested and survived. So we now have solid support levels on which GM stock can build upside momentum.
Given that there’s so much uncertainty from the political environment, however, I would rather bet on downside support holding than upside potential coming to fruition. So I will use GM options.
GM Stock Options
Right now, I’m not willing to risk $39 per share to buy the stock at face value. That leaves absolutely no room for error. With my strategy, the stock can fall another 20% percent and I can still retain maximum gains.
This is important because the China tariff situation looks better but is not completely resolved. President Xi promised to lower the current tariff on automotive imports and if that happens, GM is in great shape to profit from it. I can’t say the same about Ford Motors Company (NYSE:F).
The Trade: Sell GM JAN 2019 $30 puts. This is a bullish trade for which I collect 90 cents to open. I have a 85% chance of collecting maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my break even point of $29.10.
Selling naked puts is daunting, especially during the current uncertain political climate. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the GM JAN 2019 $30/$28 bull put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 14.9% if successful.
Get my free newsletter and subscribe to my YouTube channel 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 as @racernic on twitter and stocktwits.
