On March 18, I wrote a post on trading the options of General Motors (NYSE:GM) in which I told you that I will ignore news of a recall and buy the GM Sep 2014 39.000 calls at an asking price of $1.22. Well, it turns out that General Motors is not exactly the kind of company on which contrarian moves are smart because practically everything that can go wrong with the company has gone wrong from the time of the writing until date.
Nonetheless, I was hoping that the company would be able to salvage itself by posting at least decent results when it posted Q2 2014 results today. However, I was in for a shocker when the company reported sickly results with $1.2B in recall-related costs. The situation took a turn for the worse as other contrarians who have been hoping that the company will miraculously defy bearish expectations joined the bears in selloff.
To cut the long story short, shares of General Motors and dropped 4.09% (and counting) to $35.88 from an open of $36.67 as at 2:46PM EDT. The September 39 call that I bought at an asking price of $1.22 had dropped to an unspeakably low price of $0.25.
Should You Avoid GM Options Now?
The Yoruba people of Africa have a saying that when a warrior falls from a horse, the next course of action is not to wallow in self-pity but to mount the horse again. In light of this wise saying, we will mount the horse of GM Options once again but we will play smarter this time around with GM put options. GM puts are the smartest port of call now in order to recoup our losses on the ill-fated September calls and in order to save face with profits down the road.
Below are some reasons why it is smart to be bearish on General Motors:
Unimpressive Second Quarter Results
As I have stated earlier, one of the things that precipitated the selloff on GM stock today was the uninspiring second quarter results. The company reported that net income dropped by a whopping 79% from the year ago quarter to $0.29B to make $0.58 per share to surpass the consensus estimate by $0.01. Second-quarter revenues rose by 1.3% from the same period last year to $39.6B; nonetheless, the revenue missed the consensus estimate of $40.1B.
Plagued By Unending Recalls
General Motors has announced 31 recalls in the United States as at June this year. Its Australian subsidiary, GM Holden, announced the recall of some 46,000 Commodore and Caprice cars models of year 2014 because of pretensioner wiring harness. You will recall 1.5 million cars produced in China for replacing a fuel-pump bracket.
Another interesting point to note is that General Motors is under “multiple” investigations for delaying the recall of vehicles with defective ignition switches. Other investigations are also checking to see if the pre-bankruptcy GM was involved in bankruptcy fraud to avoid liability claims.
How to Trade GM Options
All these recalls and investigations are hanging over General Motors like a dark cloud and the stock is likely to continue facing the heat in the near term. Given the current situation of things at General Motors, the smartest move is to buy put options in anticipation of further downsides on the stock. I recommend the GM Jan 2015 35.000 put (GM150117P00035000) at an asking price of $2.20, which should turn a profit when share of GM drops below $33 per share.
— Daily Option Alerts