With shares on sale both off and on the price chart, it’s time to back up the truck from General Motors Company (NYSE:GM). But to keep your investment better protected, buckling up with a GM stock modified collar strategy is a great option to buy. Let me explain.
The last couple months have been akin to a car wreck for General Motors shareholders. GM stock is off nearly 25% since its June high when bulls were busy noisily supporting items like the company’s autonomous-driving unit Cruise and GM’s annual sustainability report.
But some short-lived general market fatigue in June followed by GM’s July earnings miss and weak outlook quickly took away investors spirited drive and it’s been a southbound one-way street ever since. The good news is shares of General Motors are now in position to reverse higher.
Now Wall Street has parked GM into deep value territory off and on the price chart — providing investors with a sizable and well-covered 4.30% dividend. So it’s an easy decision to pull the truck into GM stock and smartly protect that position using a modified collar.
GM Stock Weekly Chart
I’ll be the first to admit that back in June when GM stock challenged last October’s all-time high of $44.99, I fully-expected a double-top. Shares were well-overbought, so breaking through resistance in the near-term wasn’t technically favored at the time. Nice call, right? That said, I also thought the topping pattern would be short-lived and wind up being a bear trap with GM racing to new highs.
Now, shares are showing promising technical value on the price chart. GM stock has aggressively pulled itself into a test of 2013’s former highs, a lower Bollinger band and 50% retracement level — all supported by a deeply oversold stochastics indicator.
Looking forward — and bearing in mind the aforementioned 4.3% dividend and GM stock’s current 6x forward earnings multiple — it’s time to once again safely buckle up and back up the truck in General Motors.
GM Stock Modified Collar Strategy
The good news in being wrong on the price chart in June is by positioning smartly in GM stock our bullish error was minimized to 1% of GM’s own 20% declined. Reviewing GM stock’s options board for new ideas and appreciating today’s described value situation, I’m favoring a partially-hedged or modified collar on shares.
With General Motors around $34.06 this position buys shares, purchases the December $33 / $28 put spread for limited, but realistic protection against continued GM stock weakness and sells the December $39 call to partially finance the vertical for a net debit of $34.76.
This position offers decent downside protection below GM stock’s recent low of $33.44 for a premium to shares of just 2%. At the same time this modified collar collects the next quarterly dividend, offers solid upside potential up to $39 and ultimately, the flexibility to adjust the position and continue riding a friendlier trend in the weeks and months ahead.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits