Minyan Mailbag: GM Options
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.
Dear Mr. Succo,
I own the General Motors (GM) 2007 30 Puts . I came home expecting to see huge losses, but my options were only off by $1.30. I remember a month ago before GM had its big announcement GM was trading at around these levels and the puts were worth $3 and change and now they are worth $7 and change. I am puzzled.
position in GM
First of all, the stock was up yesterday over Mr. Kerkorian's tender price of $31 after it traded some 60 million shares, nearly six times the normal recent volume (one funny thing is that so far we haven't actually seen a tender offer from Mr. Kerkorian, just the rumor of one).
The stock traded as such mostly due to an engineered short squeeze: a "large holder" of some 30 million shares unexpectedly recalled the previous night the stock "he" was lending out (meaning the owner of those shares who was previously lending those shares to short sellers pulled them back). Short sellers were forced to cover (buy back) their short position at the market price. The stock was up for primarily technical reasons.
As an aside, I think it is hilarious that several brokerage firms that had been strongly recommending selling the stock turned around last night and recommended it. Why didn't they see the value before Mr. Kerkorian's dealings?
Anyway, your option position is "overvalued" exactly because of the technical situation described above. Option traders that were short puts and hedging it with short stock had to cover that position. They had to pay any price necessary to cover those short puts so they bid them up to prices that cleared the market. The only sellers of puts yesterday (because no one could borrow the stock) were holders of stock who sold their stock and sold those puts (as a pseudo-stock replacement) to take advantage of those high prices.
For the same reason all calls were trading much cheaper than theoretical value.
Once the stock becomes available to borrow again (whenever that is), those puts will fall in price to theoretical value based on the current implied volatilities as traders can once again step in and arbitrage those prices.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter