The automotive industry had a strong year in 2020, but automotive stocks have had a rougher time in 2021 as a semiconductor shortage has shut down production for many carmakers. One trader sees the potential for a drop in General Motors (GM) in the coming weeks.
That’s based on the July $57.50 puts. With 50 days until expiration, over 25,132 contracts traded against an open interest of 256, for a 98-fold rise in volume.
The options are slightly in-the-money based on a current price just under $57 per share. The buyer o the put options paid about $3.05.
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GM shares started the year off strong, then have started trading in a volatile, choppy pattern. Shares peaked in early April, and have generally been in a downtrend ever since. That’s as shares have seen flat revenue growth in the past year, but a 927 percent rise in earnings.
Action to take: The choppy trading pattern is likely to persist, so traders on either side can try and time a peak or trough and take the opposite tack. The July puts play to the current semiconductor shortage right now, and in the past few sessions shares have traded up, and could hit a technical point where a further decline makes sense.
For $3.05, or $305 per contract, this is an inexpensive hedge on any market uncertainty or fear in the next few weeks, and offers traders mid double-digit return potential (or better on a steeper selloff).
Disclosure: The author of this article has no positions in the stock mentioned here, and does not intend to make a trade on this company after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.