Monday, January 3, 2011

JP Morgan Says Buy GM Calls Using the Proceeds from Your Sell Ford Calls (GM; F)

GM is trading up 2.14% at $37.65, F is up 2.83% at $17.26.
From ZeroHedge:

In a bid to preserve groupthink, and to finally let Getco off the hook from going chapter if GM's price were to ever drop below $33, JPM's Equity Derivatives desk led by Adam Rudd, who is recommending a trade based on Himanshu Patel's view that GM is massively undervalued, has just come out with a trade recommendation to buy GM March $38 calls funded by selling Ford $17 calls. After all can't let a government funded post-reorg story ever go to waste. And for JPM's functioning retard clients, here is the trade's explanation: "We believe that this trade may be particularly attractive for those investors who anticipate outperformance of GM relative to Ford." One quick look behind the scenes indicates that this call is nothing more than a less than glaringly obvious attempt to recreate the options trading frenzy seen in Ford stock in mid/late October in GM, now that Ford derivatives mania is over.
From the report, which seeks to open a new room in the 2011 hedge fund hotel, which is already chock full with a variety of other names, but most notably Apple, which has been occupying the presidential suite for two years now...
We recommend buying March $38 (~103%) calls on GM for $1.55 (~4.2%) and selling March $17 (~101%) calls on Ford for $0.91 (~5.4%) for a net credit of around 1.2%. This strategy is known as a call switch trade (selling a call on one stock to fund a call on another stock). In this way, an investor has a long GM/short F position, in a rally. If both stocks are below their respective strike prices at expiry, the investor would simply retain the 1.2% net premium that is received upon entering the trade. Figure 1 shows the scenarios (GM and Ford share price moves between now and March expiry) under which the call switch trade would generate either a profit or a loss.
What is surprising is that while JPM is obviously going all out on GM, it is throwing out that other momentum driven name, F, which is likely about to see a short-term top based on this call...MORE
See also:
If You Absolutely Insist on Having Some General Motors, Look at the Convertible Preferred (GM; GM.Pr.B)

1961 Chevrolet Corvette Convertible

What's not to love about a GM convertible?
('61 Vette Roadster)