PeakTrader.com

[arthur]

The possibility of GM declaring bankruptcy (although remote) should be taken into account. Consequently, it may be wise to adopt a strategy to mitigate some risk. One strategy is to hedge shorter-term calls with longer-term puts.

For example, the Mar 22.5 calls closed at 2.65 and the Jan 25 '07 puts closed at 8.60 Friday. Consequently, 200 calls cost $53,000 and 20 puts costs $17,200. If GM rises to 30 within three months, the 200 calls may be worth roughly $160,000 [or rise to 8], while the 20 puts will be worth roughly $6,000 (or fall to 3). If GM declares bankruptcy, the calls will fall to zero, and the puts can potentially rise to $50,000.

Currently, GM is beaten down and volatile enough for opportunties to buy calls when it falls and buy puts when it rises. However, a catalyst may soon send GM way up, if it doesn't declare bankruptcy. Nonetheless, if a large call position is bought, then a put position should also be bought to offset some risk.