Automobile producer General Motors (GM) jumped nearly 10 percent on Wednesday, on news that they were undertaking a large share buyback. One trader sees the potential for shares to trade flat or lower from here instead.
That’s based on the June 2024 $32 puts. With 217 days until expiration, 8,276 contracts traded compared to a prior open interest of 219, for a 38-fold rise in volume on the trade. The buyer of the puts paid $2.70 to make the bearish bet.
General Motors shares traded just over $31.50, so GM would need to decline about 2 percent from its current price for shares to move in-the-money.
Even with the recent jump higher, GM is still well off its 52-week high of $43.63, and is much lower to its 52-week low of $26.30.
The company’s recently announced $10 billion buyback represents about 25 percent of its market cap of about $40 billion. As the company buys back more shares, its debt load will look worse.
Despite that negative, shares trade at about half their book value and at about 4 times earnings.
Action to take: Investors may be facing a value trap with GM.
Shares look cheap, but their high debt levels and today’s interest rate environment could make further price appreciation a challenge. Investors interested in automakers should look elsewhere.
For traders, the June 2024 puts could pay out well if we get a spring selloff in the stock market. Traders may want to start building a position now, and increase it after any holiday rally.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.