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Posts Tagged ‘GM’

How to make 45% with a Safe Bet on GM

Friday, March 11th, 2016

Lots of people like GM. It is one of the most popular stocks in some of the largest mutual funds in America. Investors seem to like the 5.2% dividend it pays. Today I will show you how you could make 8 times that much with an options bet that will net 45% even if the stock doesn’t go up by a penny.

Terry

How to make 45% with a Safe Bet on GM

First, an update on my last 3 trade recommendations. Five weeks ago, I suggested a trade that would make 66% after commissions if Facebook (FB) closed at any price above $97.50 on March 18, 2016. FB is now trading above $106 and that looks like a sure winner when it closes out a week from today.

A little over 3 weeks ago I suggested a similar trade on Costco (COST) when it was trading at $147.20. This one would make 40% after commissions if COST finishes at any price above $145 next Friday (March 18th). It is now trading near $152. This one also looks like a sure winner.

The third suggestion was made two weeks ago, and it involved Nike (NKE) which according to both the Nasdaq and EarningsWhispers.com would announce earnings on March 17, just before the Mar-16 options expired. Now it appears that my sources were both wrong. The announcement (still unconfirmed) will probably not take place until the following week. We had expected that our long calls would benefit from rising expectations before the announcement, but we should have bought calls with a week of additional life to take advantage of that possibility. Even worse, the stock has fallen about $3 since we placed the spread, and it looks like it will end up being a loss unless the stock rallies strongly next week.

Today, I am suggesting a play on General Motors (GM). There is a lot to like about GM. For the second year in a row, Barron’s ranked it as one of its five favorite stocks for the coming year. Their 2015 prognosis was not a good one as the stock fell from about $35 to $30 in 2015 in spite of 5% higher sales and earnings. Barron’s second try seems to be more likely to work out.

In its January earnings announcement, GM exceeded expectations all around, authorized a new $5.5 billion buyback, and raised guidance. The market hardly budged, apparently worried about GM’s Chinese sales (which had gained 12% in 2015) and some concerns about price cutting from rivals.

The company sells at a P/E ratio of only 5.2 and pays a well-covered dividend of 5.2%. There are very few other companies out there selling so low with such a dividend.

Kevin O’Leary, “Mr. Wonderful” of Shark Tank, in a recent AARP interview, said that his mother told him never to buy a stock that didn’t pay a dividend, and that over the past 40 years, 71% of the returns on the S&P came from dividends, not capital appreciation. Dividends are clearly important these days, mostly because they usually provide a solid floor for the stock price. When the overall market fell in the first few weeks of 2015, GM edged briefly down to the $28 level, and quickly recovered back above $30 where it stands now.

A recent Seeking Alpha article makes a compelling case that GM could double in value over the next 4 years – General Motors: Multiple Catalysts Should Double Your Money By 2020. One the biggest reasons the author cited was GM’s fast-growing finance arm which has so far not contributed anything to its parent’s coffers, but which could be soon passing on $1 billion a year or so.

I am not convinced that GM is destined to move significantly higher over the next few years, but I am comfortable believing that the combination of a high dividend rate, low P/E, a large buyback program, stable sales, and the finance arm possibility suggest that the stock is quite unlikely to fall very much from its current level.

I am suggesting a bet that GM will be at least $28 when the Jan-17 options expire on January 20, 2017. If that is true, this spread would make 45% on your money after commissions. That means it could fall about 8% from where it is now ($30.50), and the same 40% gain would result.

In the same AARP article, the Sharks recommended that you should expect to make 4% to 6% on your money each year over time. It seems to me that it makes sense to put some of your money, at least a small portion, in something that could make many times that much if the risk level is reasonable.

I made this trade in my personal account yesterday to confirm that this price was available:

Buy To Open 10 GM Jan-17 25 puts (GM170120P25)
Sell To Open 10 GM Jan-17 28 puts (GM170120P28) for a credit of $.98 (selling a vertical)

I collected $980 less the $25 commission, or $955 (of course, you could sell a single spread and take only 1/10th the risk). My maximum loss and net investment is $2145. This works out to be a 45% gain if the stock closes at any price above $28. I will make a gain at any price above $27.05. When the Jan-17 expiration date comes along, I will not have to do anything. If the stock is at any price above $28, both the long and short put will expire worthless and I will be able to keep the $955 I collected at the beginning. It feels like a safe investment to me, and a whole lot better than the 5.2% dividend they are paying.

 

Try a Vertical Put Credit Spread on a Stock That You Like

Thursday, January 8th, 2015

This week I would like to share my thoughts about the market for 2015, and also one of my favorite option strategies when I find a stock I really like. Whenever I find a stock I particularly like for one reason or another, rather than buy the stock outright, I use options to dramatically increase the returns I enjoy if I am right (and the stock goes up, or at least stays flat).

Today I would like to share a trade that I made today in my personal account.  Maybe you would like to do something similar with a company you particularly like.

And Happy New Year – I hope that 2015 will by your best year ever for investments (even if the market falls a bit).

Terry

Try a Vertical Put Credit Spread on a Stock That You Like

First, a few thoughts about the market for 2015.  The Barron’s Roundtable (made up of 10 mostly large investment bank analysts) predicted an average 10% market gain for 2015.  None of the analysts predicted a market loss for the year.  Others have suggested that the year should be approached with more caution, however. The whopping gain in VIX in the last week of 2014 is a clear indication that investors have become more fearful of what’s ahead. The market has gained about 40% over the past two years.  The bull market has continued for 90 months, a near-record–breaking string.

The forward P/E for the market has expanded to 19, several points higher than the historical average, and 2 points above where it was a year ago.  The trailing market P/E is 22.7x compared to 14x for the 125-year average.  Maybe such high valuations are appropriate for a zero-interest environment, but that is about to change. For the first time since 2007, the Fed will not be propping up the market with their Quantitative Easing purchases. The Fed has essentially promised that they will raise interest rates in 2015.  The only question is when it will happen.

There is an old adage that says “don’t fight the Fed.”  Not only have they stopped pumping billions into the economy every month, they plan to raise interest rates this year.  Like it or not, stock market investments made in 2015 are tantamount to picking a fight with the Fed.

While the U.S. economy is strong (and apparently growing), a great number of U.S. companies depend on foreign sales for a significant share of their business, and the foreign prospects aren’t so great for a number of countries. This situation could cause domestic company earnings to disappoint, and stock prices could fall.  At the very best, 2015 seems like a good time to take a cautious approach to investing.

Even if the market is not great for 2015, surely some shares will move higher. Barron’s chose General Motors (GM) as one of its best 10 picks for 2015 and made a compelling argument for the company’s prospects.  The 3.27% dividend should insulate the company from a big down-draft if the market as a whole has a correction in 2015.

I was convinced by their analysis that GM was highly likely to move higher in 2015.  Today, with GM trading at $35.70, I placed the following trade:

Buy To Open 10 GM Jun-15 32 puts (GM150619P32)

Sell To Open 10 GM Jun-15 37 puts (GM150619P37) for a credit of $2.20  (selling a vertical)

I like to go out about six months with spreads like this to give the stock a little time to move higher.  The above trade put $2200 in my account.  There will be a $5000 maintenance requirement which is reduced to $2800 when you subtract out the amount of cash I received.  This means that my maximum loss would be $2800, and this would come about if the stock closes below $32 on June 19, 2015.

If the stock closes at any price above $37, both the long and short puts will expire worthless and I will not have to make any more trades.  If this happens, I will make a profit of $2200 (less $25 commission, or $2175) on an investment of $2800.  This works out to a gain of 77%.

In order for me to make 77% on this investment, GM only needs to go up by $1.50 (4.2%).  If it stays exactly the same on June 19th ($35.70), I will have to buy back the 37 put for a cost of $1.30 ($1300 for 10 contracts).  That would leave me with a gain of $862.50, or 30.8%.

If I had purchased shares of GM with the $2800 I had at risk, I could have bought 78 shares.  I I might have collected a dividend of $91 over the 6 months.  With my options investment, I would have gained nearly 10 times that much if the stock did not move up at all.

Bottom line, even though I am taking a greater risk with options, the upside potential is so much greater than merely buying the stock that it seems to be a better move when you find a company that looks like it will be a winner.

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