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General Motors Short-Term Traders Switch Gears

Speculators take a bearish stance on GM

by 12/4/2012 11:37 AM
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Bullish speculators have been zeroing in on General Motors Company (NYSE:GM - 24.67) lately, according to data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, the equity's 10-day call/put volume ratio sits at 6.44, with calls bought to open outpacing puts by a margin of more than six to one during the past two weeks. This ratio ranks higher than 98% of comparable readings taken within the past year, indicating traders have been snatching up calls over puts at a near annual-high clip.

Likewise, Schaeffer's put/call open interest ratio (SOIR) for GM checks in at 0.32, confirming calls more than triple puts among options scheduled to expire in the next three months. This ratio hovers just eight percentage points above a yearly nadir, meaning short-term options players have rarely been more call-heavy toward the stock during the last 12 months.

However, the majority of today's GM traders are of the bearish variety. More than 5,400 puts have changed hands so far, almost doubling the equity's expected intraday volume. By comparison, just over 1,800 calls have traded. Most popular have been the weekly 24.50 and 25.50 strikes, which have seen about 1,300 and 1,800 put contracts cross the tape, respectively.

Most of these contracts were exchanged at the ask price, pointing to buyer-driven activity. Specifically, the 24.50 puts traded at a volume-weighted average price (VWAP) of $0.17, while the 25.50 puts were purchased at a VWAP of $0.66. Since today's volume exceeds current open interest levels at these strikes -- along with the fact that implied volatility has crept higher for both during the course of the session -- it can be assumed that new positions are being added here. In the case of the 24.50 puts, speculators need GM to fall below $24.33 (strike price less the VWAP) by expiration this Friday in order to realize a profit on their bearish positions. Meanwhile, the 25.50-strike traders are betting on the stock to keep retreating south of the $24.84 mark.

It should also be noted that while short interest on the auto behemoth declined by about 2% during the past month, these bearish bets still account for a respectable 8% of GM's available float -- or roughly seven days' worth of pent-up buying demand, at the stock's average pace of trading. This raises the possibility that some of the aforementioned call buying could be the result of short sellers seeking to hedge their positions.

Meanwhile, most of the analysts covering GM seem to have high expectations. The stock boasts nine "strong buys" and one "buy" recommendation, compared to three "holds" and one "sell" suggestion. What's more, the security's average 12-month price target sits at $32.94, reflecting expected upside of about 29% to Monday's closing price of $25.51.

This vote of confidence among the brokerage bunch isn't surprising, given GM's year-to-date gain of more than 22%, as well as its year-over-year advance of about 18%. The shares have also bested the broader S&P 500 Index (SPX) by north of 15 percentage points during the past three months. However, today's 3.3% drop has put the stock on pace to close beneath its 10-day moving average for the first time since Nov. 20.


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