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| quote: | Originally posted by jerZ07002
i'm not sure that shorting GM is that risky. Don't the government loans have a convertible feature? If so, that will have an enormous dillutive effect on the equity. |
GM stock is in the neighborhood of impossible to borrow these days. The stock loan department is charging -100% for the borrow last I checked. There are better ideas out there.
Edit: Assuming your broker can even give you a good locate. Also, May GM puts with a $2 strike are currently going for ~$0.88, so based on my own calculations you'd need at least a 40% decline in the stock by May 16 in order to just break even on your purchase. If they go BK, that's certainly a likely scenario, but it's a pretty risky game to play in a 1 month timeframe (though we all know the situation is getting dire and we're close to some sort of important event). Let's say you hypothetically spent $10,000 on some of the aforementioned puts, GM goes to zero and you cash in. You basically buy about 115 puts with a $2 strike. Stock goes to zero, you exercise (or more smartly just sell the puts to minimize transaction costs and maximize the leverage). You know are short 11,500 shares of GM with a $2 cost. You get $23,000 from the effective short sale (from exercising the puts). Net of your $10,000 purchase price, you made ~$13,000--a 130% return in 1 month. Not bad, though probably not exactly how things play out.
One problem I see with the strategy is that once companies declare bankruptcy, their stocks do not automatically go to zero overnight. FNM and FRE, which are essentially worthless equities given effective government nationalization, are still trading around $1 each---more than 6 months after the fact. If that happened with GM, you'd have the right call and would make next to nothing for it, if anything at all. Bottom line, it's not as easy a trade as you might think.
If you were to stretch out your horizon a bit to try to give the stock more time to go to zero, you'd have to pay up on the premium for your puts. Fwiw, September $2 puts on GM are going for $1.40ish. Even if the stock went to zero, you'd make a pretty paltry return for the amount of risk you'd be taking on. (~70 contracts...sell 7,000 shares short at $2, leaves you $4,000 of profit on a $10,000 investment. 40% return is great, but certainly not a trade I'd want to make given how stomach wrenching it would likely be to watch over time.) And that is the max you'd be able to make. More realistically, I'd bet you wouldn't even clear $3,000 on such a trade. And to put it in perspective, if you sold the puts outright instead of exercising them--with GM at $0, the puts would theoretically be worth a maximum of $2 each. So on your original purchase, you net $0.60 of profit on each contract leaving you $4200 of profit. That was more to show that you can get a little better return by selling the options as opposed to exercising them, though not a huge amount.
And none of my calculations took into account any transaction costs which would certainly whittle away your profits.
Last edited by Shakka on Apr-14-2009 at 16:02
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