It might be the most famous market axiom: Buy low and sell high. But for savvy options traders, an even better idea may be to sell put options. And that's just what one big trader did on a hard day for General Motors.
GM shares fell more than 3 percent Monday as news of deep discounts on trucks taxed the stock, leading automakers to be the S&P 500's worst-performing industry on the day. But one major options trader looked to take advantage of that downdraft by selling 4,700 January 2015 30-strike GM puts for about $2 each.
This trade grants the seller nearly $1 million in premium, in exchange for obligating him to buy the stock for $30 in January 2015 if it falls beyond that level. However, subtracting the $2, the stock will be bought at an effective price of $28 a share—a 20 percent discount from where GM closed Monday.
Even better, while buying the stock would tie up capital, the trader now has the opportunity to reinvest that $1 million.