How to Triple Your Profits Trading GM
General Motors has had a recent bit of publicity and anytime a stock is in the news, that means it is more in play with both institutional and retail traders — and maybe even the president, who seems to have a lot of opinions on the matter.
After hitting a recent high Monday, GM stock is still up more than 12 percent over the past month. Could this be the start of a rally on the back of $6 billion in cost savings from staff reductions and plant closures?
After looking at the options on GM, it is apparent there is an opportunity to profit several different ways. First, the ex-dividend date is Dec. 6 and with earnings not until February (which could lead to additional volatility), this seems like it could be an ideal candidate for a covered call.
The ex-dividend date is the date upon which the holders of the shares of stock are recorded in order to receive the dividend, which is paid out a few weeks later. So one would only need to hold the shares on that date in order to receive the dividend payout. The extrinsic value of in-the-money puts show a careful reader the options chain that there will approximately be an 86 cent dividend per share, or a 2.34 percent return on the current price of $36.69.
So by buying the shares, we can expect to see a 2.34 percent dividend return on this part of the portfolio, which on its own isn’t too shabby — certainly better than the vast majority of CD or savings accounts — but we can potentially do even better …
If one were to purchase 100 shares of GM, then an out-of-the-money call could be sold against those shares. I described in my article how covered calls can be a high class problem to guarantee gains, and how they work.
Essentially, we would get to keep the amount of the premium sold on the call plus any gains in the price of the stock up to the strike price of the call that was sold. And now with the ex-dividend date in the next week, we would get to keep the dividend per share as well!
By buying 100 shares as of the price of this writing at $36.69, it would cost half the stated amount if buying on margin at $1,834.50, then by selling the Jan. 18 Call at 80 cents per share, plus taking in the dividend at 86 cents per share for a total of $1.66 per share, that would be a 9 percent return on capital.
And if GM goes up to or above $39 per share between now and the Jan. 18 expiration of the call, the trade would make an additional $2.31 per share for a total return of $3.97 per share, or a 21.6 percent return on capital in the next 51 days.
And here’s the best part, because of taking in the credit on the sale of the call plus the dividend, the breakeven price per share would be $35.03 which is nearly 5 percent below the current price of $36.69.
With the options having extra premium at this time and having the ex-dividend date only a week away, this could be potentially the best time in recent memory to sell a covered call in GM.
Christopher M. Uhl, CMA, MOSM
Founder, CEO and Head Trader of 10minutestocktrader.com
Host of the Wall Street Report, The Fastest News in Finance
Host of the How to Trade Stocks and Options Podcast
Trading Writer for MoneyandMarkets.com