Big Trader Bets GM Will Stall Out
With the government getting out of General Motors, one big trader thinks it's the perfect time to collect some money by selling options.
In a single trade, over 3,200 June 36-strike calls were sold shortly after the Treasury Department released a statement that it will sell 30 million shares of GM.
The United Auto Workers will also sell an additional 20 million shares of the Motor City staple, slowing any potential rally on the stock with a total of 50 million shares now on the market.
Since there are suddenly 50 million new shares hitting the market, this trader is expecting the stock to stay stagnant or increase in value slightly, but not to rise above $36. This call is very likely being sold against a long stock position.
In that case, this trader will collect the entire premium from selling the call if the stock stays below $36, but is losing the right to capture any gains above $36.
(Read More: US Treasury to Sell 30 Million More GM Shares)
The Treasury gave notice that it will sell out of its $300 million position in the company by early next year, which has resulted in the slight slump that GM is experiencing on Wednesday.
This makes perfect sense—since the Treasury has committed to selling stock, traders figure that they will be able to wait and purchase the shares at a lower price as a supplier tries to unload inventory.
After the Treasury has finished dumping its position, the stock should climb back up. After all, investor expectations in the company have become more positive, given that GM has been showing growth since its crisis, and has generally been rallying from lows made last summer.
(Read More: GM Finally Turns the Corner With Investors)
All seems to be going well for GM, and the sale is actually a bullish sign: The government is showing confidence in the market by taking its hand out of Detroit's pockets.
All in all, a combination of stock coming to market via the government balancing, and the stock being added to a major index, should keep the stock range-bound. This makes it a good candidate for a buy-write trade like this one.