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Gambling On Record Highs for General Motors Company (GM)

One General Motors Company bull bought long-term calls ahead of earnings

by 4/22/2014 11:35 AM
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Option Brief: General Motors Company (NYSE:GM) is following the broader equities market into the black this morning, after the automaker asked a federal bankruptcy court to protect the "new GM" from recall-related lawsuits. While the shares of GM have added 0.8% to $34.26, the stock remains more than 16% lower in 2014, and has underperformed the broader S&P 500 Index (SPX) by about 12 percentage points during the past three months. Nevertheless, one options trader is rolling the dice on a steady ascent to record highs for GM, which reports earnings before the open on Thursday.

Around midday, the stock has seen roughly 20,000 calls cross the tape -- more than two times the number of puts exchanged. More than 40% of the call action has centered on the January 2016 40-strike call, which saw a block of 7,500 contracts change hands for the ask price of $2.44 apiece. The International Securities Exchange (ISE) confirms the LEAPS were bought to open by a long-term bull.

By purchasing the calls to open, the buyer is hoping GM is sitting atop breakeven at $42.44 (strike plus premium paid) -- in uncharted territory -- when January 2016 options expire. From the equity's current perch, it would take an ascent of almost 24% in order to topple breakeven. Risk, meanwhile, is limited to the initial premium paid for the calls, should GM stay south of the strike through the option's lifetime.

As alluded to earlier, General Motors Company (NYSE:GM) is slated to report first-quarter earnings Thursday morning. Should the firm disappoint, a round of downgrades could be in the cards; 10 out of 13 analysts maintain "strong buy" opinions of the shares.


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