Hi there, I am new to options and I was hoping that someone might comment on the risks of this position: I bought 600 GM Puts June @ $1.00 for $0.60 I bought 200 GM Calls June @ $2.00 for $0.10 I plan on buying another 400 Calls later on today, at around $0.03 because their price keeps going down, just in case that it won't get into bankruptcy. I assume that the price would go drastically either up or down. If it stays the same, I understand that it won't be too good for me. I don't own the underlying GM stock. Would I be covered if the stock price moves to: a) below $0.60 b) above $2.70 Thank you very much. Regards, Ovi
Options are risky because you are betting on speculation. I suggest you do a lot more research before going out and trading a ton of options like you are asking. There are numerous strategies that investors use to generate additional capital on thier equities. Trading options on GM in general is risky. Good Luck
Going short or long GM is/was risky. Buying options is a way to limit your risk. I stuck with my thesis that GM is bankrupt more than 2 months ago. It's bankrupt now and people are still in denial: the puts are no longer available to trade as of today. However, I didn't want to short the equity on fear of what Obama would do. Hence, the best way to mitigate my risk was to go with puts. Even 2 months ago, when everyone knew that GM was heading towards bankruptcy, you could still get in on the puts with decent premiums. The potential return was 200%. Not as good as if you bought them 5 months ago, but still. Don't risk more than 1-2% of your portfolio on options, unless you go with LEAPS and have strong conviction with your thesis. Also, don't straddle. It's a waste of money. Use options to hedge, or bet with leverage, but not to eek out small gains every so often.
By the way, for anyone in denial: GM Bankruptcy comes on Monday. Following bankruptcy, GM will be dropped from the DOW. Being dropped from that index will cause mutual funds/ETFs to drop massive amounts of shares. GM will also be delisted from NYSE. Today's drop was just a warm up for next week. Anyone long GM right now is out of their minds.
For you to come out ahead, (assuming you got the calls at the price you wanted) the price of GM has to go below 34.66 cents by end of june. Or GM has to move above 2.6533 Thats not including your commissions for buying and selling. Not to be insulting but to put down $40,000 when you dont know much about options seems a little excessive to me. I sure hope you have deep pockets and didnt go all in with your whole trading account.
Hello everyone, Thank you very much for your comments. I know I took a lot of risk doing this, but I am a junior scientist, I run out of a job a couple of months ago so I borrowed the funds and did this. Hopefully if this will work out it will buy me some time so that I can continue to support my work. Thanks again, Ovi
Ovi, Your borrowed money to make this trade? wow in so many ways that is so wrong. At the same time there is the saying that you only need to become rich once. I hope this works out for you. Lets go over the math and see how close this old trader can get to the outcome. GM goes BK on June 1st. By the end of option exp date IMHO GM is trading about 3 cents a share. Lets go with 5 cents just so we are including the transaction fees etc... add in the cost of the calls of about 4 cents ave per put and that puts your cost basis at about 64 cents each. exercise your options on exp day (Friday the day technically before exp day) and cover for five cents. Brings up your cost for the transaction to 69 cents or with other expenses lets say 70 cents. 30 cent gain on 600 contracts = $18,000 by my math. Best of luck to you on your trade and your trading. (I would not recommend that you borrow money next time for a high risk trade though. better to save up for the next one ) Robert
Shouldn't have hedged with the calls.. Don't know why nobody mentioned, but bonds would be the best hedge..if GM doesn't file, meaning it doesn't default. there will be gov backing and the bonds will have a 500%-700% upside from 2 dollars...
Hi there, Is it possible that even if GM is bankrupt its stock price will not get down? I can see that today, after filling, actually increased. Thank you very much. Regards, Ovi