The auto stock that could accelerate this week
GM shares have shifted into high gear lately. And one option trader is betting big that the bullish momentum will continue through the end of this week.
GM gained 6 percent last week, and on Monday morning, one option trader bet that the upward momentum will spill into this week. With GM at $36.42, we saw an option trader buy 777 GM 36-strike calls expiring this Friday for 75 cents. This is a $58,275 bet that the stock will be above $36.75, or about 1 percent higher, by Friday.
It is no secret that the auto industry has been on a tear lately, as consumers finally feel comfortable upgrading America's aging fleet of cars and trucks. GM is up more than 25 percent this year, but there continue to be several catalysts on the horizon that will allow the stock to appreciate further.
First and foremost is the global macro economy, which is growing, albeit slowly. The point here is that this story is not just about America; the improving European economy and growth in China are driving demand overseas that GM stands to benefit from.
(Read more: Auto profits to surge, over half coming from China)
Additionally, the U.S. government is currently in the process of selling its massive stock position in the company. In December, the U.S. Treasury said it would completely liquidate its 300 million shares in the next 12 to 15 months, which means the sale should be completed between December 2013 and January 2014.
All of this selling puts downward pressure on the stock, and once it is lifted, shares could move much higher.
Consider the similar case of AIG. It was stuck below $35 per share while the government unwound its stock position, but since the selling was completed in December 2012, it has risen 45 percent.
And it's not just the U.S. government selling GM. The United Auto Workers is also in the process of liquidating its position. And it has been reported that the Canadian government, which holds roughly 10 percent of the company, also plans to sell its stake in the near future.
Since exiting bankruptcy, GM has secured an $11 billion line of credit, and is using that cash to invest in further growth. By the end of 2013, GM will have upgraded 70 percent of its models, and the company is currently building four new plants in China to meet demand there.
(Read more: GM's former boss blasts automaker's old ways)
All of these factors should guide GM shares higher over the long term. But in the near term, the stock will be driven by momentum and market sentiment, which is what this option trader is looking to benefit from.
Yet while momentum trading can be lucrative, it also has its risks, and we would recommend that investors take a longer-term approach when trading GM. The company looks poised to grow over the next one to two years, so long-dated call options and warrants are our preferred method of gaining exposure while limiting downside risk.