Despite so-called experts warning that the automobile industry is at “peak auto,” auto sales have remained strong for years. Consumers have been resilient with their love for cars. Tastes shift from year-to-year, but overall we all love our vehicles.
There have been trends from sports cars into SUVs, then into sedans and back into SUVs. But the net effect is that auto manufacturers are doing well. And therein lies the opportunity today.
General Motors (NYSE:GM) stock has been depressed all year. It’s down 15% when the SPDR S&P 500 ETF (NYSE:SPY) is up 8% for the same period. This is much better than Ford (NYSE:F), which is down 25%. So GM is doing things right in relative terms.
While Tesla (NASDAQ:TSLA) hogs the headlines, General Motors delivers millions of cars. But GM stock has failed to stabilize since last October. It has had ups and downs, but the trend has been lower. It has since fallen about 20% lower.
GM stock is entering a well-consolidated area, however, that should have support from the value already in the stock. General Motors stock sells at a lean pric-earnings ratio of 8, so it has shed most of the froth already. To go much lower from here, it would need a specific reason.
My bet is that management will not give Wall Street something that opportunity. They continue to do the right thing through 2018.
To monetize this thesis, today I sell downside risk into what others fear to create income without any out-of-pocket expense. Equity markets are at all-time highs and there’s a good chance that we have a few dips in the next few weeks. So I am less confident in GM stock upside then I am in its downside support.
If I see stabilization in it I could at a later date ad upside calls to my strategy, but for now I’m happy taking a risk against proven support.
Technically, $34 per share is a long-term pivot area for GM. These tend to be supportive on the way down. Both bulls and bears will want to fight over it as they’ve done in the past thereby creating congestion.
This is a rubber band and not a hard floor, which is why selling puts makes even more sense than buying upside hopium.
Most analysts agree since GM is rated as a hold and it’s now trading well below their average price target.
The Trade: Sell GM Jan 2019 $31 put for 70 cents per contract. Here I have a 90% theoretical chance of success. Otherwise, if the GM stock price falls below it, I would suffer losses below $30.30.
Selling naked puts is daunting, especially when markets are at all-time highs. Those who want to mitigate that risk can sell spreads instead.
The Alternate Trade: Sell the GM Jan 2019 $31/$29 credit put spread where risk is limited. Yet, this spread would deliver 20% in yield.
Although it would benefit from one, today’s trade doesn’t need a rally to profit.
I merely need General Motors stock to hold its support for the next few months. I am betting that the value in GM stock will prevent sellers from taking too far. It is important to know that if they do, then I want to own the shares at a discount from here.
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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.
