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General Motors Company (GM) Probe Results Fail to Deter Option Bull

A trader initiated a long call spread on General Motors Company

by 6/5/2014 11:56 AM
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General Motors Company (NYSE:GM) is in the news this morning, as CEO Mary Barra earlier divulged the embarrassing results of a probe into the company's ignition switch recall. Amid this buzz, the automaker's options volume is nearly triple the average intraday rate, with 88,000 contracts on the tape so far. Furthermore, the stock's 30-day at-the-money implied volatility (IV) is 6.3% higher at 22.5%, signaling increased demand for short-term GM contracts.

One of the more interesting trades to transpire this morning involved matching blocks of 2,777 calls at the July 37 and 40 strikes. Specifically, the July 37 calls traded at the ask price of $0.86 each, while the July 40 calls were exchanged at the bid price of $0.14 apiece, for a net debit of $0.72 per pair of contracts. According to Trade-Alert, this was likely the work of one individual initiating a long call spread on GM.

In order for the trader to profit at expiration, the shares must rally north of $37.72 (bought strike plus net debit). Additional gains will be secured with each step north of this breakeven mark the stock notches through the close on Friday, July 18, when the options expire. However, the speculator's profit is capped once GM hits the sold strike, resulting in a maximum potential reward of $2.28 per pair of contracts (difference between the strikes, less the net debit). Meanwhile, the trader's maximum potential loss is the initial net debit, should the shares be sitting below $37 at expiration.

On the technical front, General Motors has struggled since hitting a record high of $41.85 in late December. Specifically, the equity has lost roughly 13% of its value since then, and now trades at $36.45.

Nevertheless, the Street remains enamored with GM. Nine out of 13 covering analysts have given the equity a "strong buy" rating, compared to just three "holds" and one "strong sell" recommendation. Also, the stock's average 12-month price target of $43.73 sits in unexplored territory, 20% above the current share price. In other words, the door is wide open for a round of downgrades and/or price-target cuts to pressure the security south.

As mentioned earlier, General Motors Company (NYSE:GM) received a black eye this morning, when Barra fired 15 executives and engineers for their contributions to a massive vehicle recall, which was prompted by the deaths of at least 13 drivers. The CEO said the investigation uncovered "a pattern of incompetency and neglect" within the company -- though it failed to unearth any signs of a cover-up.

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