Trader Bets GM Will Get Into Gear
On Tuesday morning, March auto sales came in at levels not seen since May of 2007.
General Motors' March sales were up 6 percent year-over-year "thanks to a strengthening economy and new products," said Kurt McNeil, GM's vice president of U.S. sales operations. Pick-up trucks have been particularly strong, as contractors and other businesses start to replace aging fleets.
(Read More: Buckle Up: Auto Sales Surge in March)
Despite the strength, which was in-line with expectations, shares of GM dropped Tuesday morning. This prompted some traders to step in and buy upside calls into the weakness. The biggest trade of the morning was the purchase of 1255 May 29-strike calls for $0.55, which was done with the stock at $27.60. This is a bullish bet that the stock will be above $29.55, or 7 percent higher, come May expiration.
GM has lagged the broader market's rally in 2013, and it is down 5 percent year to date. The main reason for GM's underperformance this year has been Europe, and some clarity on when a turnaround there will occur is likely to be the catalyst that sends the U.S. automakers higher.
The stock has failed to breech resistance at $29.30 twice this year, but this option trade bets that the third time will be the charm. On Jan. 15, GM left an unfilled gap from $29.72 to $29.95, which it could gravitate towards if it breaks out through resistance.
Playing GM with calls instead of a stock position is smart, because there is no telling when the European economy will show a meaningful turnaround.
On Tuesdy morning, the Eurozone Purchasing Managers Index came in at 46.8, indicating continued contraction. Seasonally, the U.S. market is strong in April and weak in May, so a fixed-risk options position allows you to play a rally without risking a lot should the market turn lower.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."