3 May 2007 – Today, GM reports earnings. Again, though it worked out for us on the BIDU Calls, I generally don’t like holding puts through earnings announcements as it is very difficult to gauge how the market will react to poor or better than expected earnings. As much as I believe GM is headed for a fall, I still will hold true to my 40% stop loss on these positions, possibly using a mental stop loss instead of a “hard” stop loss today by closely monitoring activity on these puts. Again, using strict stop loss rules is always a smart thing as unlimited downside from options is a myth. If you use strict selling rules, you should almost NEVER suffer a 100% loss on any option play, and that’s how you supplement your portfolio with consistent gains from options versus making the occasional option play a pure crapshoot.
This just in…GM Reports Earnings. Last week, I wrote this about GM puts:
“My thinking behind making this transaction was as follows. I admittedly missed out on some potential huge gains by not playing put options on subprime lenders during the subprime lending fallout. However, I don’t believe that the fallout is yet over,and accordingly, I searched for ways to still capitalize on the continuing fallout. GM was a company with four factors working against them.”
(1) significant subprime lending exposure;
(2) cloudy, convoluted direction and statements from management (never a positive thing);
(3) a business on the downturn; and
(4) a clearly formed bearish wedge in the midst of a downtrend.
Though I couldn’t figure out the reason behind the single day rallies behind GM’s stock, sometimes the market acts irrationally and there is nothing you can do to stem irrational behavior, especially in the short term. Sometimes, it’s as simple as traders trying to manipulate rallies for the mere purpose of shaking the shorts (those shorting the stock) out of their position. So had GM rallied today and hit my stop loss points even though everything tells me GM was heading for a fall, I still would not have abandoned my discipline. However, just as I suspected, in a story out of New York, this was reported minutes ago:
“General Motors Corp Thursday reported a sharp contraction in quarterly profit that was far below analysts’ estimates, due in large part to its financial services unit’s exposure to the non-prime sector of the residential mortgage business.”
In pre-market trading, GM is sharply down $0.84, or 2.59%. So given that the stock shouldn’t rally on such dismal earnings, it appears that we will be able to hold on to these options for the next week or so and see what develops.
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
