A quick glance at the headlines doesn’t seem to offer much solace for investors of automotive giant General Motors (GM). The car industry along with a host of other sectors affected by tariff threats from President Donald Trump suffered badly during Monday’s session. GM stock in particular incurred a loss of more than 3%.
According to the Associated Press, the “automotive sector faces a bumpy road ahead. The industry’s production processes are heavily intertwined throughout the nations impacted by tariffs,” which are Mexico, Canada and China. Further, the economic action is also imposing a headwind on auto parts companies, including tire company Goodyear (GT), which slipped almost 2% on Monday.
What makes the matter even more frustrating for investors of GM stock is the underlying company’s latest fourth-quarter earnings performance. During the three months ended Dec. 31, General Motors — when stripping out the company’s $5 billion restructuring charge related to its underperforming Chinese joint ventures — earned $1.92 per share. This figure topped the consensus view of $1.85.
On the top line, sales hit $47.7 billion from $42.98 billion against the year-ago quarter. More importantly, the latest tally also beat Wall Street’s estimate of $44.98 billion.
Despite the positive print, investors were focused on an increasingly difficult ecosystem in China. Plus, General Motors CEO Mary Barra acknowledged uncertainty over trade, tax and environmental regulations in the U.S.
Still, to that end, Barra mentioned that her company has been proactive with Congress and President Trump’s administration. Combined with a favorable statistical backdrop, adventurous investors are incentivized to consider a long position in GM stock.
The Smart Money is Piling into GM Stock
On the surface, a cursory view of unusual options volume might not seem that encouraging for GM stock. Yes, the equity made up the ranks in Barchart’s unusual stock options volume screener. In fact, the 151,304 contracts traded on Monday (against an open interest reading of 590,389 contracts) stood at 146.46% above the trailing one-month average metric.
So, what’s the problem?
Call volume stood at 75,767 contracts, meaning that put volume was necessarily almost identical: 75,537 contracts. Since markets have an upward bias, people generally wish to see a sub-1 put/call volume ratio. However, the way the math looks right now, it seems as if an equal number of traders are bullish as they are bearish.
However, options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — reveals a completely different framework. Indeed, net trade sentiment yesterday hit $2.04 million, overwhelmingly favoring the bulls. Therefore, the high volume of puts transacted were sold puts, which generally have neutral to bullish implications.
But for me, the kicker is the statistical data. Over the past five years, the price action of GM stock when viewed stochastically — that is, devoid of any context aside from the temporal — demonstrates an upward bias. A position entered at the beginning of the week has a 50% chance of rising by the end of it. Over a four-week period, the long odds improve to 52.67%.
What’s really interesting, though, is the dynamic framework — probabilities based on specific conditions. Whenever GM stock loses between 5% and 10% of equity value over a one-week period, the subsequent week rises 56.25% of the time. Over a four-week period, the dynamic long odds improve to an impressive 64.52%.
This is an important point to remember because last week, GM stock dropped 8.85%. If statistical trends play out as predicted, GM could be poised to rise.
Market Makers are Offering an Incredible Deal
Using the market intelligence above, there’s almost a 65% chance that by the options chain expiring Feb. 28, GM stock could conservatively rise to reach $51.85. On the risk side, negative scenarios could see GM fall to $45.65. Ordinarily, you’re not going to find attractive transactional costs for such wide spreads.
However, the market makers in my opinion are giving you a freebie — or about as close to a freebie as one can get. By buying the 45/52 bull call spread for the options chain expiring Feb. 28, investors can enjoy measured speculation.
Specifically, the $52 short call represents the ultimate price target of GM stock under a bullish run. On the other hand, should the trade go somewhat awry, the $45 long call provides intrinsic value. In other words, so long as GM stays above $45, you could potentially close the spread with some value intact.
Finally, as of Monday’s close, the net debit paid for this transaction is $364 for the chance to earn $336. That’s mighty attractive considering the intrinsic protection the above long call provides.
