GM – CALL Option

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At the time of this writing GM is trading at approximately $33.25 per share.  A couple of weeks ago I wrote about the opportunity to open a short PUT position for GM.  In the quick article it was proposed that the oversold status of GM provided a good dividend opportunity at $31 dollars.  A PUT at the strike of 30 provided a good return on the margin capitalized and if one was assigned owning GM at $30 was even better than $31.  The write up and the option details for that PUT trade can be found here.

The position detailed on 9/15 was a success as GM was above 30 on Septembers monthly expiration of that week.  It was so good you might have placed the same trade for the following week!  I did.  This time the trade garnered 0.17 cents for the same 30 strike PUT.  So far, the GM PUT provided $31 dollars in profit.  However, for the expiration of the SEP4 weekly expiration GM was below the strike of 30.  Therefore I was assigned the stock and took on a position.  My personal commission situation played out like this.

  • Buy/Sell of one (1) option contract: $2.95 commission (+$0.05 reg. fee)
  • Assignment of underlying:                 $15.00 commission
  • For the two trades, my net was $31.00 – (2 x $2.95) – (2 x $0.05) – $15 = $10.00

Yes, that’s right.  This trade has made a whopping $10 bucks.  It doesn’t look like much at first blush, but there were effectively no commission costs for taking on 100 shares of a stock at the price desired.

Now, here comes the fun part.  GM has been rising heavily since the assignment back on September 25th. The position has gained $3.25 per share. When would one take profits?  What if we can take profits without taking profits!?  The initial trade required $3000 of cash or assets on hand within the trading account to be placed.  Shorting a CALL option requires the seller to be prepared to sell stock at the price agreed upon with the buyer of said option.  Since the stock is now owned, a CALL option can be placed with the holding as the margin.  This provides an opportunity to make more premium from option sales and keep the stock position.

What opportunities avail for GM CALL options?

The October expiration is a little too close and provides little premium.  For the sake of increased premium I chose the November monthly expiration.  Here’s a quick look at Novembers open interest.  We can quickly see that there’s not a lot of expected activity around the 35 strike and highest concentrations at 31.  Further the chart below shows a RSI of almost 70.  MACD and the price channel are also indicating that the stock is priming for a potential pull back.  Alternatively, if GM continues to escalate in price, 35 would be a very profitable short term play for the stock position held.  The 35 strike is selling at a premium of 0.61 cents.  It will be 43 days till expiration of the November contract.

Here’s the set up (minus commissions):

CALL option - GM

On an APY basis (not that we can do this trade every 43 days) this comes out as a 17.2% return.  On a commission included basis the trading methodology detailed here is providing approximately $80.00 dollars in options premiums after $9.00 dollars in commissions.  If I was to be assigned on Friday November 20th and had to sell the 100 shares of GM for $35, I would have made $470 dollars on the position after paying $30 dollars in commissions on the stock assignments.

Ah the proverbial having your cake and eating it too.

Here’s the pretty chart for GM:

GM _ 2015.10.08

*Charts from Trade Architect™


Disclaimer: The information presented does not consider your personal investment objectives and should not be taken as a recommendation. Further, it shall not be construed as an offer to sell or a solicitation to buy any security mentioned. The risk of loss in any stock, option, or futures trade can be substantial. Consider all relevant risk factors before trading.

 

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