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Long-Term Option Bulls Target General Motors Company (GM)

GM fans are flocking to January-dated call options

by 3/21/2013 2:56 PM
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The shares of General Motors Company (NYSE:GM - 28.67) may be down, but options traders aren't counting the stock out. In afternoon action, the automaker has seen roughly 48,000 calls cross the tape -- more than double the norm. For comparison, around 11,000 GM puts have traded thus far.

Most popular are the equity's January 2014 30- and 35-strike calls, which have seen around 15,100 and 12,700 contracts change hands, respectively. Nearly all of the LEAPS have traded on the ask side, and implied volatility is trending higher at both strikes, hinting at newly bought bullish bets.

By purchasing the 30-strike calls at a volume-weighted average price (VWAP) of $2.54, the buyers will begin to profit if General Motors muscles back atop the $32.54 level (strike price plus VWAP) by January 2014. Meanwhile, the VWAP of the 35-strike calls is $1.01, indicating a breakeven of $36.01 for the buyers. Both of these breakeven levels stand in territory not charted since the first half of 2011. Nevertheless, the most the buyers are risking is the premium paid at initiation.

However, today's appetite for bullish bets is par for the course for GM. In fact, traders have bought to open five GM calls for every put during the past two weeks on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Even more telling, the stock's 10-day call/put volume ratio of 5.00 stands higher than 82% of all other readings of the past year, suggesting speculators are scooping up calls over puts at a faster-than-usual clip.

That optimism is also prevalent among the brokerage bunch. Despite underperforming the broader S&P 500 Index (SPX) during the past three months, GM boasts 10 "buy" or better endorsements, compared to four lukewarm "holds" and just one "sell" recommendation. Plus, the consensus 12-month price target of $34.94 represents expected upside of nearly 20% to GM's closing price of $29.20 on Wednesday, and stands in a neighborhood not explored in more than two years.

At last check, General Motors Company is down 1.4% to trade near $28.67. The security has run into a wall in the $29 region, which has smacked GM lower for the past couple of months. Plus, the April 29 strike is home to more than 8,000 calls outstanding, which could act as an additional layer of options-related resistance in the near term.


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