GM option play

newguy05 · Apr 14, 2009

1) GM most likely to file for bankruptcy as the government is pushing for it
2) The timeline is around June latest.
3) Once bankruptcy is filed, stock will crash and all otm options will drop close to zero, as evident by leh.

Based on that, i am thinking of making the following trades:

1) short the stock at $1.75
2) sell the sept 2P for $1.4
3) buy the may 2.5C for $0.15 (as hedge in case of blackswan and gm shoots up).

All 3 positions are of equal size. If gm does not file by end of may expiration, i will roll position 3) to june expiration.

I really dont see much risk involved in this trade, due to the insane premium on the 2P. What do you guys think?

atticus · Apr 14, 2009

Quote from newguy05:

1) GM most likely to file for bankruptcy as the government is pushing for it
2) The timeline is around June latest.
3) Once bankruptcy is filed, stock will crash and all otm options will drop close to zero, as evident by leh.

Based on that, i am thinking of making the following trades:

1) short the stock at $1.75
2) sell the sept 2P for $1.4
3) buy the may 2.5C for $0.15 (as hedge in case of blackswan and gm shoots up).

All 3 positions are of equal size. If gm does not file by end of may expiration, i will roll position 3) to june expiration.

I really dont see much risk involved in this trade, due to the insane premium on the 2P. What do you guys think?

You're short a Sep 2 call 1.15 and long the May 2.5 call from .15. You're short vol in a diagonal calendar netting 1.00 if GM common is worthless.

CloroxCowboy · Apr 14, 2009

<B>IF</B> you can locate the stock to short...my broker could not find any for me.

IV would be a concern since prices are so choppy right now. Other than that, it does look like a nice premium to sell.

4444CJones4444 · Apr 14, 2009

Quote from CloroxCowboy:

<B>IF</B> you can locate the stock to short...my broker could not find any for me.

IV would be a concern since prices are so choppy right now. Other than that, it does look like a nice premium to sell.

Retail traders are going to have a tough time shorting GM stock.

atticus · Apr 14, 2009

Why short the stock at absurd borrowing rates? Sell the Sep call outright.

CloroxCowboy · Apr 14, 2009

Quote from atticus:

Why short the stock at absurd borrowing rates? Sell the Sep call outright.

One strategy is limited risk (close to arb'd), the other is unlimited risk.

nazzdack · Apr 14, 2009

Quote from CloroxCowboy:
....the other is unlimited risk.

Theoretically, yes. Hypothetically, yes. Realistically, no. When has GM traded near "infinity"?

CloroxCowboy · Apr 14, 2009

Quote from nazzdack:

When has GM traded near "infinity"?

I'll answer your question with one of my own:

Was LTCM a success?

"Theoretically, yes. Hypothetically, yes. Realistically, no."

But whatever floats your boat...

atticus · Apr 14, 2009

Quote from CloroxCowboy:

One strategy is limited risk (close to arb'd), the other is unlimited risk.

They're identical, excluding changes in financing. I am referring to the synthetic short call [short spot/short put] vs. the natural short call -- coupled with the long May call.

Selling the natural call instead of the synthetic with short stock. He should buy the May call as well, that's not the point. My point was simply that it's best to avoid the stock in the equation.

nazzdack · Apr 14, 2009

Quote from CloroxCowboy:
Was LTCM a success?

1) Was it?.... Answer: "It depends on when you exited".
2) You can get out of GM "at the market".
3) I prefer to rent boats, not own them.
4) Too many people are paralyzed at the thought of short-selling because they have an irrational fear that whatever they short-sell will all of a sudden go to "infinity". It's silly, ridiculous, paranoid and pessimistically-biased.