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General Motors Bulls Bet On a Move Higher

Short-term speculators circled around GM's November 27-strike call yesterday

by 11/7/2012 10:35 AM
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Calls were the options of choice on General Motors Company (NYSE:GM - 25.57) throughout the course of Tuesday's session. Around 65,000 call contracts crossed the tape, representing nearly four times the average daily call volume. Meanwhile, fewer than 9,200 puts were traded.

The out-of-the-money November 27 call emerged as the most actively traded strike on the day. Of the 42,784 contracts traded, the majority crossed at the ask price, and open interest surged overnight, making it safe to assume new bullish positions were created here yesterday. By buying these calls to open for a volume-weighted average price of $0.20, traders will profit with each step north of $27.20 (the strike plus the premium paid) GM takes through next Friday, when November options expire. This represents a 6.4% premium to the stock's current price.

Widening the scope, Tuesday's call-skewed session fits with the longer-term trend that's been developing in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day call/put volume ratio of 3.32 ranks higher than 98% of other such readings taken over the past year. In other words, calls have been bought to open over puts at a near annual-high clip in recent months.

Additionally, GM currently sports a Schaeffer's put/call open interest ratio (SOIR) of 0.31. Not only does this show call open interest more than triples put open interest among options expiring in three months' time, but it ranks in the lowest percentile of its annual range. Simply put, short-term speculators are more call-heavy now than at any other time within the last 52 weeks.

On a technical basis, GM has had a solid run up the charts in 2012, with the shares up more than 25% year-to-date. Plus, on a relative-strength basis, the stock has outperformed the broader S&P 500 Index (SPX) by nearly 26 percentage points over the past 60 sessions. This strong price action has been highlighted by the equity's 10-week moving average, which has ushered GM higher since mid-August.

In today's session, GM is falling in step with rest of the broad market, and was down around 2.4% at last check. Should the stock fail to topple the aforementioned breakeven level by expiration, the November 27-strike call buyers can rest easy knowing the most they stand to lose is the initial premium paid.


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