General Motors (GM) Option Traders See Downside

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General Motors (GM) Option Traders See Downside

After General Motors Company (GM) released its fiscal fourth quarter results report, investors purchased up the company’s shares. Analysts had anticipated General Motors to report $1.15 profits per share (EPS) and $34.24 billion in sales; however, the firm reported $1.35 EPS and $33.58 billion in revenue. The $35 billion investment in electric and driverless cars by GM through 2025 will be accelerated or perhaps increased with the money saved by not reinstating its dividend.

Following a 40% increase in share price in 2021, GM’s shares have fallen 10% in 2022. Despite facing a chip and component scarcity that necessitated the temporary shutdown of many plants during the year, the business reported record profits for 2021. Vehicle sales decreased globally, down by 18% from pre-pandemic 2019 levels. GM provided cautious estimates for full-year 2022 sales and profit, but it expects the supply of chips to increase this year.

In the foreseeable future, option traders expect the share price of GM to decline. This is due to the recent change in option order sentiment from optimistic to pessimistic as a result of the decline in share price in 2022. Although there are more call options than put options listed in the open interest, implied volatility shows that traders are really selling upside calls while buying downside puts.

Key Takeaways

  • The share prices of GM have lately been lowered by traders and investors.
  • Based on historical volatility, the GM share price recently closed in a range that was below normal.
  • Supply chain issues have been faced by the automotive sector, particularly with reference to semiconductors.
  • GM has outpaced its industry, but from the year’s beginning, it has fallen behind the market.
  • Support and resistance levels based on historical volatility permit a greater move to the upside.

Auto Industry Comparison

Due to a recent decline in sales, General Motors (GM), which has ranked first among automakers in terms of sales in the United States for over a century, has now lost that position. In terms of market valuation, the business may surpass rival Ford Motor Company (F), putting GM in third position among the largest automobile stocks, after Tesla, Inc. (TSLA), and Toyota Motor Corporation (TM).

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With the exception of Toyota, all of these businesses have reported losses during the previous month. The following chart compares GM’s most recent performance with that of nine of the largest automaker companies by market size, as well as the Electric Vehicles and Future Mobility Index ETF from KraneShares (KARS).

This chart shows that electric car companies like Tesla, Nio Inc. (NIO), and Lucid Group, Inc. (LCID) were outperforming their gas-focused counterparts at first, but that has changed as 2022 has gone on. Toyota and Honda Motor Co., Ltd., two titans of the industry, are positioned close to the best-performing manufacturers (HMC).

KARS is an exchange-traded fund that invests in publicly traded equities of firms with substantial income streams from energy storage, autonomous navigation, lithium and copper mining, hydrogen fuel cells, and electric cars. One of the top holdings in this ETF is GM, which has been aggressively pursuing market dominance in the electric car space as seen by its decision to increase expenditure in this sector.

Due to the COVID-19 pandemic and an ongoing chip scarcity, the automotive sector has been impacted by supply chain issues. The main reason why GM lost its position as the leading carmaker in the United States has been attributed to this chip scarcity. The following graph compares the performance of GM recently with that of Tesla, KARS, State Street’s Consumer Discretionary ETF (XLY), and iShares’ Semiconductor ETF (SOXX).

This graphic is fascinating since it includes Tesla, the leading producer of electric vehicles, KARS, and possibly the biggest problem affecting today’s automotive industry (the chip shortage), which is represented by SOXX. Automobile producers are seen as belonging to the consumer discretionary sector, which is often thought to perform poorly during inflationary periods as consumer spending becomes more centered on desires than on requirements. It is noteworthy that GM stock has maintained its lead over the other companies on this chart since the start of 2022 despite a number of challenges, including a chip shortage, sector shift, and revenue shortfall.

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Price Action and Option Outlook

Chart watchers may get important information into the general opinion toward GM stock prior to the earnings release by comparing technical analysis of share price movement and recent option trading activity. The price movement of the GM share price as of Thursday, February 3 is seen in the chart below.

The graph shows how the price of GM shares has changed after the business released its quarterly results. As seen by the leftmost green arrow, GM shares increased to an extreme high of the volatility range after the release of third quarter results. The green arrow indicates the rise in GM shares to the extreme high of the range at the end of 2021 after trading in an average range around the 20-day moving average. The red arrow indicates the extreme low of the volatility range reached by the GM share price since the start of 2022. After results, GM stock increased 2.5%, but it is still fluctuating below averagely, having lately closed below its 20-day moving average.

On this graph, the purple bands reflect an extreme historical volatility range generated by four standard deviations of the 20-day Keltner Channel indicators, which show price levels that are multiples of the average true range (ATR) for the GM stock. An established technique for displaying historical volatility over time is the ATR. The extremes of option pricing might be understood to be represented by these bands.

It is noteworthy that these bands broaden during periods of declining price movement and shrink during periods of rising price movement. The bands are presently the broadest they have ever been on the chart, indicating that option traders could be anticipating greater declines in the price of GM stock.

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The open interest and option trading volumes both seem optimistic at first look. That’s because the open interest has more over 1 million calls against 694,000 puts, and recent trading volumes showed 78,000 calls vs 43,000 puts. While a first glance suggests that these numbers are positive, a closer examination reveals important information.

The one option having the largest open interest for February 18, the next month’s expiry date, is the $65 call, with 37,000. This would increase the share price of GM by 22%. The $50 put has 30,000 open interests, which is the second-highest amount. This suggests a far more probable 5% decline in the price of GM stock today.

The implied volatility shows that traders are selling calls and buying puts, despite the fact that the raw figures seem optimistic. That’s because the open interest is increasing but the implied volatility for upward calls is decreasing, which signals that traders are selling these options. While the open interest is increasing, implied volatility for downside puts is increasing, suggesting that traders are purchasing these options.

Wrapping Up

Recent challenges for the automotive sector have included chip shortages that have impeded output. GM overcame this obstacle and achieved record profits, but it lost its top position among American automakers. While option traders seem to be selling calls and buying puts, indicating that they believe the price of GM stock will continue to decline, investors purchased shares on the day the firm disclosed results.

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