General Motors (GM) Option Traders See Downside

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General Motors (GM) Option Traders See Downside

Investors increased their holdings of General Motors Company (GM) stock after the company published fiscal fourth-quarter profits. Analysts predicted GM to report $1.15 EPS and $34.24 billion in sales; however, the firm reported $1.35 EPS and $33.58 billion in revenue. GM does not intend to restart its dividend, but rather to use the saved funds to accelerate or potentially increase its $35 billion investment in electric and driverless cars through 2025.

After rising 40% in 2021, the GM share price has dropped 10% in 2022. Despite a chip and component scarcity that necessitated the temporary shutdown of many operations during the year, the firm achieved a record profit in 2021. It sold fewer automobiles globally, down 18% from pre-pandemic sales in 2019. GM anticipates chip supply to increase this year, but provided cautious estimates for full-year 2022 sales and profit.

Option traders predict that the GM share price will fall in the near future. This is because recent option order sentiment has moved from optimistic to negative as the share price in 2022 has fallen. Implied volatility shows that, despite the fact that call options outnumber puts in open interest, traders are selling upward calls and buying downside puts.

Key Takeaways

  • GM’s share price has lately been reduced by traders and investors.
  • Based on historical volatility, the GM share price just finished in a lower-than-average range.
  • The automotive sector has been dealing with supply chain issues, particularly with relation to semiconductors.
  • GM has outperformed its industry, but has trailed behind the market since the beginning of the year.
  • Support and resistance levels based on historical volatility allow for a greater move to the upside.

Auto Industry Comparison

GM’s recent sales collapse led in the business losing its number one ranking carmaker in terms of U.S. sales, which it had maintained for almost a century. In terms of market value, the business might surpass rival Ford Motor Company (F), putting GM in the top three automotive stocks by size, after Tesla, Inc. (TSLA) and Toyota Motor Corporation (TM).

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With the exception of Toyota, each of these corporations has reported negative returns during the last month. The figure below compares GM’s recent performance to that of nine of the largest automaker companies by market capitalization, as well as KraneShares’ Electric Vehicles and Future Mobility Index ETF (KARS).

On this chart, electric car companies like Tesla, Nio Inc. (NIO), and Lucid Group, Inc. (LCID) were outperforming their gas-centric counterparts, but that has changed as 2022 has proceeded. Toyota and Honda Motor Co., Ltd. are among the top manufacturers in terms of performance (HMC).

KARS is an exchange-traded fund that invests in worldwide listed stocks of businesses that generate substantial income from electric vehicles, energy storage technologies, self-driving cars, lithium and copper mining, and hydrogen fuel cells. GM is one of the ETF’s top holdings, since the firm has been aggressively pursuing electric car market share, as seen by the company’s intention to increase expenditure in this area.

The automotive sector has been impacted by supply chain limitations as a consequence of the COVID-19 epidemic, as well as a long-standing chip scarcity. This chip scarcity has been identified as the primary cause for GM’s loss of the top carmaker ranking in the United States. The figure below contrasts GM’s recent performance with that of Tesla, KARS, State Street’s Consumer Discretionary ETF (XLY), and iShares’ Semiconductor ETF (SOXX).

This figure is intriguing since it contains KARS as well as Tesla, the leading electric car maker, as well as possibly the most serious problem afflicting contemporary automotive production (chip shortage) through SOXX. Automobile makers are classified as part of the consumer discretionary sector, which is often seen as a bad performer during times of inflation, as consumer spending becomes more focused on desires rather than requirements. It’s worth noting that, despite several headwinds—chip shortages, sector rotation, and revenue misses—GM stock has maintained a significant lead over the other companies on this chart since the beginning of 2022.

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Price Action and Option Outlook

A comparison of technical analysis of share price movement and recent option trading activity might provide chart watchers with useful information about the general mood toward GM stock ahead of the earnings release. The chart below depicts the most recent price movement for the GM share price as of Thursday, February 3.

The chart shows the performance of GM stock since the business released profits for the previous quarter. Following the release of third-quarter results, GM shares climbed to an extreme high of the volatility range, as seen by the left-most green arrow. After trading in an average range around the 20-day moving average, GM shares surged to the range’s extreme high near the end of 2021, as shown by the green arrow. The GM share price has fallen to an extreme low of the volatility range since the beginning of 2022, as shown by the red arrow. After results, GM stock increased 2.5%, but it is still trading in a below-average range, having lately closed below its 20-day moving average.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for GM stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.

It’s notable that these bands narrow during times of upward price movement and widen during times of downward price movement. The bands are currently at the widest of any point on the chart, illustrating that option traders may be expecting further downside in the GM share price.

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At first glance, option trading volumes and the open interest both seem bullish. That’s because recent trading volumes featured 78,000 calls compared to 43,000 puts, and the open interest features over 1 million calls compared to 694,000 puts. While a first look at these figures appears bullish, a further analysis provides key details.

For Feb. 18, the next monthly expiration date, the single option with the highest open interest is the $65 call, with 37,000. This represents 22% upside to the current share price of GM. The second highest open interest is on the $50 put, with 30,000. This represents a much more realistic 5% downside to the current GM share price.

While the raw numbers appear bullish, implied volatility suggests that traders are selling calls and buying puts. That’s because implied volatility for upside calls is falling while the open interest is rising, which suggests that traders are selling these options. Implied volatility is rising for downside puts while the open interest is rising, which implies that traders are buying these options.

Wrapping Up

The vehicle sector has lately encountered severe hurdles, most notably semiconductor shortages that have slowed output. GM managed to turn a profit despite losing its status as the leading automaker in the United States. While investors purchased shares on the day the firm disclosed results, option traders seem to be selling options and purchasing puts, signaling that they believe GM stock will fall further.

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