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General Motors (GM) stock shows a large, unusual volume of call options trading today in an out-of-the-money strike price expiring in two weeks. That could be a bullish sign from investors who are selling covered calls for extra income.
GM stock is at $47.49 today up 5% from yesterday, down from a recent high of $54.22 on Jan. 23. GM hiked its annual dividend per share (DPS) by 25% on Feb. 26. That makes it very much more attractive to dividend and value investors.
Dividend Yield Target Price
I discussed this in a recent Barchart article on Feb. 28, “General Motors' Huge Dividend Hike and Buybacks - Value Investors Love GM Stock.” I showed that the stock could be worth more now that its dividend per share (DPS) is 25% higher at 60 cents.
For example, based on data from Morningstar, its average 3-year dividend yield has been 1.0%. Right now at today's price, GM has a 1.26% dividend yield (i.e., $0.60/$47.49 = 0.01263).
Therefore, using this 1.0% yield to set a target price, GM stock could be worth $60.00, or 26.3% more:
$0.60 / 0.01 = $60.00 target
$60.00 / $47.49 = 1.263 = +26.3% upside
As a result, investors see a good upside in the stock over the next year.
This could be one reason why options players are selling covered calls in out-of-the-money (OTM) strike prices.
Unusual Call Options Trades
For example, today's Barchart Unusual Stock Options Activity Report shows that over 6,100 call option contracts have traded at the $53.00 exercise price for expiration on March 21. This can be seen in the table below.
It shows that the midprice is 21 cents for these call options. That means that the investors who sold these calls as covered call transactions have an immediate yield of 0.44% (i.e., $0.21/$47.50 = 0.00442 = 0.44%).
Moreover, the buyers of these hope to see GM rise to over $53.22 just to break even in terms of intrinsic value (i.e., $53.00 strike price +$0.22 ask price of the call premium). That is +12% higher than today's price.
That is quite a move for this stock in just two weeks. It leads to the conclusion that the initiating transaction activity was likely from sellers of these calls, likely from existing owners of GM shares.
That means they are comfortable in selling the stock at $53.21, or 12% higher than today's price, if GM stock rises to this price. Moreover, if the investor can repeat this trade every 2 weeks for a quarter, the expected return is 0.44% x 6 = 0.0264 = 2.64% quarterly, or 10.56% annually.
The bottom line is that this is a good way for existing shareholders in GM stock to make extra income, even if it results in a capital gain over the next 2 weeks. That could be one reason why there is such a large unusual activity in GM call options today.
