PeakTrader.com

[arthur]

The four-month chart below shows a general downtrend with heavy monthly volume over the past three months. A lot of negative news is reflected in the stock price and bearish sentiment is extreme. The 52 million shares traded one day last week indicated heavy institutional selling for end-of-the-year window dressing. The chart's indicators suggest an oversold bounce next week and a positive catalyst should send GM much higher.

The oversold condition of the stock suggests it may rise above 20 next week, or rise above 22 or 25 within the next two weeks. So, I plan to buy more short-term out-of-the money calls and at least partially hedge with long-term in-the-money puts by taking advantage of volatility. Perhaps, $3 in calls for each $1 in puts, if GM is at 20 Tuesday or Wednesday without a catalyst, is enough to partially hedge, and the calls will have more leverage.

I believe, the odds are high GM will rise above 20 sometime within the next two weeks. However, if GM rises a little next week, I'll sell some of my calls or keep the calls and buy more long-term or in-the-money puts. I want to hold a heavy position in calls, because GM has the potential to rise above 25 quickly. The puts are basically insurance in case of bankruptcy, although next year could be a big turnaround year.

Also, in the absence of a positive or negative catalyst, it may be best to take advantage of volatility to gradually shift , over the next week or two, from Jan 20 calls into longer-term calls, e.g. Mar 22.5, although the Jan options won't expire for another four weeks. Time value will decay at an accelerated rate closer to expiration, particularly over the final two weeks. However, GM showed signs of bottoming between 18 1/2 and 19 on Friday, and may either rise slowly or sharply short-term.