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General Motors Company (NYSE:GM) is down 0.4% at $34.45, as traders exercise caution ahead of tomorrow's monthly sales report and a recall-scandal analysis from former U.S. Attorney Anton Valukas, expected as early as this week. However, one group is gambling on short-term support for GM, echoing the recent affinity for put selling.
So far today, GM has seen roughly 13,000 puts cross the tape -- nearly double the intraday norm. Short-term contracts are in demand, as the stock's 30-day at-the-money (ATM) implied volatility (IV) is 6.6% higher at 22.4%.
Most popular is the out-of-the-money June 31 put, which has accounted for 5,155 contracts. However, the majority of the puts crossed on the bid side, and IV is up 4.3 percentage points at the strike, hinting at sell-to-open activity.
By writing the puts to open, the sellers expect GM to remain north of $31 through the close on Friday, June 20, when front-month options expire. Should the contracts expire out of the money, the sellers can retain the entire premium received at initiation -- which represents the maximum potential reward on the play. However, should GM breach the strike -- and fall into annual-low territory -- within the next three weeks, the traders risk assignment, and losses could be steep.
As alluded to earlier, today's appetite for short puts is just more of the same for GM. During the past 50 sessions on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have sold to open 76,419 GM puts, compared to fewer than 49,000 GM puts purchased, resulting in a sell-to-open ratio of 1.56.
However, now may not be the best time to write premium on GM. Despite today's 30-day ATM IV pop, the security's Schaeffer's Volatility Index (SVI) of 22% stands just 7 percentage points from an annual low. In simpler terms, GM's short-term options are inexpensive right now, from a historical standpoint.
On the charts, GM has surrendered 15.6% so far in 2014, ushered lower beneath its 10-week and 20-week moving averages. Off the charts, the company has been notoriously plagued by recalls this year -- and the latest sales figures from India are less than encouraging ahead of tomorrow's monthly report -- yet nine out of 13 analysts maintain "strong buy" opinions of GM. Plus, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.50 indicates that calls double puts among options expiring within three months. What's more, this ratio registers in the 24th percentile of its annual range, suggesting short-term traders are more call-biased than usual.
Should General Motors Company (NYSE:GM) continue to make headlines -- and not in a good way -- or should the shares remain trapped by trendline resistance, a shift in sentiment could spell trouble for GM. Specifically, an unwinding of optimism in the options pits and/or a round of downgrades could spark added selling pressure on the beleaguered automaker.