Smart move Sugar Snap~GM options traders bet on possible endgame
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By Doris Frankel
CHICAGO, May 22 (Reuters) - With a week to go, many options traders in General Motors Corp (GM.N), are laying bearish bets that the company will file for bankruptcy, but the sheer volatility of the stock has some bold players taking the other side of that trade.
The Obama administration has given GM, the largest U.S. automaker, until June 1 to reach agreements on cost cuts with stakeholders or follow rival Chrysler into bankruptcy.
Some investors have responded to this deadline with a flurry of bearish bets in the options market, as they see very few alternatives left for the company. Oddly, some short-term traders are also taking the opposite position, betting the shares will hold up, at least in the near term.
"The uncertainty surrounding GM's emergence from bankruptcy has led some option traders to trade in call options for its bearish put options," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
While the automaker has reached deals with union leadership in the United States and Canada to cut labor costs, it still must reach agreement with other parties, and industry analysts and experts see bankruptcy as all but inevitable.
Throughout the week, traders have been selling the $2 GM call strikes in June, July and September and snapping up $1 June put options that expire in four weeks, Wilkinson said.
Earlier in the session, traders bought the June $1 put options for 40 cents a contract, implying that its shares will fall to 60 cents by expiration in mid-June.
Since then, the premiums -- the cost of the option -- has risen to 47 cents per contract.
GM shares, which are already down 33 cents, or 17.2 percent to $1.59 in afternoon trade, would need to fall a further 62 percent for these bearishly inclined investors to be proved correct.
"The trade suggests that the stock will be worthless. The only way traders would get any profit at all is if the stock is below 60 cents a share in the next 28 days," said Chris McKhann, analyst at website optionMonster.com.
"But I would seriously consider taking the other side of that trade and selling those puts which would generate a profit if the stock remains anywhere from 60 cents and above," McKhann said.
For short-term traders, taking the other side of such a trade is not such an odd idea.
The implied volatility -- the expected magnitude of a share price move conveyed by option prices -- stood at a high 560 percent for the June $1 put strike, indicating that investors are bracing for big swings in a stock that has already traded between $1.13 and $2.23 a share in this week alone.
During the first half of the session, about 280,000 call options, which give the right to buy the stock at a fixed price and time, traded more than double the amount of put options, according to option analytics firm Trade Alert.
A put option conveys the privilege to sell the stock at a given price and time.
"Everything is on the table right now due to the questionability of GM's survival," said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group in Chicago. (Reporting by Doris Frankel; Editing by Padraic Cassidy)
