General Motors (GM) Option Traders See Downside

Number of sold call options rising in open interest

Investors bid up the shares of automaker General Motors Company (GM) after the carmaker reported earnings for the fiscal fourth quarter. Analysts had expected GM to announce $1.15 in earnings per share (EPS) and $34.24 billion in revenue—the company announced $1.35 in EPS and $33.58 billion in revenue. GM plans not to reinstate its dividend, instead using the saved capital for accelerating or even increasing its $35 billion investment in electric and autonomous vehicles through 2025.

After the GM share price rose 40% in 2021, its shares have shed 10% in 2022. The company posted record profit for 2021, despite struggling with a chip and parts shortage that forced temporary closures of various factories throughout the year. The number of vehicles it sold fell worldwide, down 18% from pre-pandemic sales of 2019. GM expects the supply of chips to improve this year but gave conservative guidance for full-year 2022 sales and profit.

Option traders see future downside to the GM share price in the near term. That's because recent option order sentiment shifted from bullish to bearish as the share price has slipped in 2022. Implied volatility suggests that, despite the open interest featuring a greater number of call options than puts, traders are selling upside calls while buying downside puts.

Key Takeaways

  • Traders and investors have recently bid down the share prices of GM.
  • The GM share price recently closed in a below average range based on historical volatility.
  • The automobile industry has been navigating supply chain constraints, specifically in regard to semiconductors.
  • GM has outperformed its sector but has lagged the market since the beginning of the year.
  • Historical volatility-based support and resistance levels allow for a larger move to the upside.

Auto Industry Comparison

The recent slump in sales for GM resulted in the company giving up its number one ranking automaker in terms of U.S. sales, a position it held for nearly a century. The company could overtake competitor Ford Motor Company (F) in terms of market cap, which would place GM in the top three automaker stocks by size, behind Tesla, Inc. (TSLA) and Toyota Motor Corporation (TM).

Over the past month, each of these companies, with the exception of Toyota, has posted negative returns. The chart below compares the recent performance of GM with nine of the top auto manufacturer stocks by market cap, along with KraneShares' Electric Vehicles and Future Mobility Index ETF (KARS).

Comparison of GM, top auto manufacturer stocks by market cap and KARS

It's notable on this chart that electric vehicle stocks such as Tesla, Nio Inc. (NIO), and Lucid Group, Inc. (LCID) were outperforming their gas-centric peers, but that has shifted as 2022 has progressed. Sitting near the top performers of automakers are industry stalwarts Toyota and Honda Motor Co., Ltd. (HMC).

KARS is an exchange-traded fund that holds globally listed stocks of companies that derive significant revenues from electric vehicles, energy storage technologies, autonomous navigation technology, lithium and copper mining, and hydrogen fuel cells. GM is one of the top holdings of this ETF, as the company has been making an aggressive campaign to capture electric vehicle market share, as evident in the company's decision to accelerate spending in this area.

The automobile industry has been struck by supply chain constraints as a result of the COVID-19 pandemic, as well as an established chip shortage. This chip shortage has been cited as the number one reason for GM losing the top automaker spot in the U.S. The chart below compares the recent performance of GM with Tesla, KARS, State Street's Consumer Discretionary ETF (XLY), and iShares' Semiconductor ETF (SOXX).

Comparison of GM with TSLA, KARS, XLY and SOXX

This chart is compelling, as it incorporates KARS along with the top electric vehicle manufacturer in Tesla, as well as perhaps the largest issue plaguing current automobile manufacturing (chip shortage) via SOXX. Automobile manufacturers are considered part of the consumer discretionary sector, which is generally considered a poor performing sector during times of inflation, as consumer spending becomes focused more on wants rather than needs.  It's notable that, despite multiple headwinds—chip shortage, sector rotation, revenue miss—GM stock remains in the lead over the rest of the stocks on this chart since the beginning of 2022.

Price Action and Option Outlook

A comparison between technical analysis of share price movement and recent option trading activity can grant chart watchers valuable insight into the overall sentiment toward GM stock ahead of the earnings announcement. The chart below illustrates the recent price action for the GM share price as of Thursday, Feb. 3.

Recent price action for GM

The chart illustrates the GM share price behavior since the company reported earnings for the prior quarter. After third quarter earnings, GM shares rose to an extreme high of the volatility range, as illustrated by the left-most green arrow. After trading in an average range around the 20-day moving average, GM shares again rose to an extreme high of the range at the end of 2021, highlighted by the green arrow. Since the beginning of 2022, the GM share price fell to an extreme low of the volatility range, highlighted by the red arrow. GM stock rose 2.5% after earnings, but it is still trading in a below average range, having recently closed below its 20-day moving average.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators, which depict price levels that represent a multiple of the average true range (ATR) for GM stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.

It's notable that these bands narrow during times of upward price movement and widen during times of downward price movement. The bands are currently at the widest of any point on the chart, illustrating that option traders may be expecting further downside in the GM share price.

At first glance, option trading volumes and the open interest both seem bullish. That's because recent trading volumes featured 78,000 calls compared to 43,000 puts, and the open interest features over 1 million calls compared to 694,000 puts. While a first look at these figures appears bullish, a further analysis provides key details.

For Feb. 18, the next monthly expiration date, the single option with the highest open interest is the $65 call, with 37,000. This represents 22% upside to the current share price of GM. The second highest open interest is on the $50 put, with 30,000. This represents a much more realistic 5% downside to the current GM share price.

While the raw numbers appear bullish, implied volatility suggests that traders are selling calls and buying puts. That's because implied volatility for upside calls is falling while the open interest is rising, which suggests that traders are selling these options. Implied volatility is rising for downside puts while the open interest is rising, which implies that traders are buying these options.

Wrapping Up

The automobile industry has faced significant headwinds recently, specifically with chip shortages that have hampered production. GM navigated this challenge to record profit but relinquished its position as the number one auto producer in the U.S. While investors bought shares the day the company reported earnings, option traders appear to be selling calls and buying puts, implying that they think further downside is in store for GM stock.

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