Minyan Mailbag: GM Puts
For now those 2007 puts seem a waste of money....
How much of a difference will these accepted buyouts make for General Motors (GM)? It seems like the stock has run quite a bit. I know it could run more. How does this affect put buying? It just seems like this is a drop in the bucket for all that GM is facing long term.
Puts are simply too high to make any money unless the stock goes to zero. In fact, this is precisely why the stock is rallying.
I described almost a year ago how investors were buying puts in GM and paying ludicrous prices. Frankly, in 25 years of trading I have never seen this much put buying. The open interest is staggering. A good deal of people were buying puts to "protect" their stock positions (although the price paid offered no real protection), but the predominant put buying was done by hedge funds buying bonds. They were using the puts as pure bankruptcy protection: they were buying the bonds cheap enough to be able to throw away a good deal of money on puts. Most of the put buying was being done in strikes below 20 with an expiration of January 2007.
Lately it has become clear that the probability of GM going bankrupt by that date has fallen dramatically. The cost savings program the company initiated, part of which you describe, has put the company on life support: it is now in critical but stable condition. They still have to figure out how to sell cars to get off life support.
But for now those 2007 puts seem a waste of money. The process of buying puts and volatility going up drove the stock down into the teens; now the process of those "hedgers" selling out those puts is driving the stock up. There has been a deluge of put selling lately.
So while the options are still too high they have come down. The fundamental position of this company is changing all the time on the margin. Is the rally over? I cannot tell you that. All I can tell you is be careful buying puts unless you think the stock is really going down fast and hard and even then you may not make money on those puts.
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