It isn’t likely living in the fast lane, but a technical tire kicking to shares of General Motors Company (NYSE:GM) supports the idea of buckling up with a moderately bullish options spread in GM stock. Let me explain.
It’s been a tough couple weeks for GM stock. Not the end of the world kind of tough, but shares are off 7.4% since hitting a one-month high on November 29. Part of the relative weakness might be chalked up to slightly disappointing November sales data. And the remainder?
After taking a peek at recent reports that might impact GM, our takeaway is there’s little in the way of headline drivers to account for the larger decline. But let’s face it, this is Wall Street.
At the end of the day, the pressure could be the result of one or two funds simply taking profits. GM stock is in fact, still up more than 20% and without factoring in the auto giant’s attractive 3.6% dividend.
Bottom line, it’s our view GM stock still looks to be in good shape off the price chart. And now, thanks to a bout of more convinced, albeit elusive sellers than buyers, General Motors shares are offering value on a price chart that almost seems like old times.
GM Stock Weekly Chart
But that doesn’t tell the whole story either. Over this period GM made a nice run higher off key price support but ultimately failed to set a new high.
This failure set up GM’s reversal lower and the stock’s current second test of its prior all-time-highs and a level of importance for bulls to hold.
GM Stock Moderately Bullish Long Butterfly Strategy
In my last write up, I outlined a bullish Jan $43/$45 call vertical for 60 cents with GM stock at $42.11. Subsequently, on two occasions the spread was fully-in-the-money, but obviously too far-removed from the January expiration cycle to capture the max payout of $1.40 and expand in price to $2.
Nice profits or the ability to establish a strong adjustment, however, were readily available.
Looking at GM’s options today and given the critical technical testing at hand, as well as the recent sign of weakness in forming a lower high of $45.35, I like the idea of approaching shares with a moderately bullish trading range position using a long January $43/$45/$47 call butterfly.
Priced for 35 cents with GM stock at $42.02 this type combination greatly reduces the trader’s out-of-pocket cost while offering reasonable profit potential from $43.35 to $46.65 and even offers fairly substantial gains of $1.65 if shares cooperate fully and land right at $45 on expiration.
The one caveat is that risk isn’t limited to losses in just one direction. Ultimately, if GM stock is either below or above the spread at expiration, the full debit is lost. As this spread falls outside the earnings cycle, and given the initial upside failure at $45.35, I’m less concerned about GM overshooting $47. If it does though, this trader does need to accept the small debit is at stake.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
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