EOT Trade Alert – February 28, 2011

Corey Williams | February 28, 2011

February 28, 2011

Trade Alert:

Buy GM June 2011 $35 Calls at $1.75 or better

Company Background:

General Motors (GM) doesn’t need much of an introduction. The US automaker is back in the game after bankruptcy and a November IPO.

Short-Term Catalyst:

The engine of the “new” GM is just getting warmed up…

The new GM stock offering priced at $33 per share on November 17th. The stock began trading the following day at $35 per share. Then a post-IPO flurry sent the stock to over $39.

Now a series of events has given us the buying opportunity we’ve been waiting for. Here’s what happened…

GM’s quarterly earnings weren’t as strong as some had hoped… Oil prices are soaring… And then this…

The Detroit News reports, “Austan Goolsbee, chairman of the Council of Economic Advisers, said the government wouldn’t wait to maximize taxpayer returns on its remaining 33 percent stake in GM.”

Clearly Mr. Goolsbee hasn’t taken the Bernanke class on stock market manipulation. This kind of talk spooked investors. They’re afraid the government is going to dump their shares as soon as they can.

I don’t believe that for a second…

The Obama administration doesn’t want to do anything to harm GM’s recovery. As soon as investors realize this, GM is going to bounce back quickly.

What’s more, GM’s stock is cheap based on their projected earnings. In fact, GM’s forward PE is just 6.5x. That’s well below the heady valuation for Toyota (TM) that checks in at 27x. Clearly, there’s plenty of upside for GM!

This fear induced selloff isn’t going to last long. Let’s jump on this opportunity to pick up cheap call options on GM.

Trade Details:

Underlying Stock Symbol:	GM
Current Bid-Ask Price:	$1.55 – $1.65
Option “Buy Up To” Price:	$1.75
Break-Even On Stock At Expiration:	$36.75
Maximum Risk Per Contract:	$175

Exit Strategy:

GM is trading at $33.27 per share. Resistance levels will be at $37 and again at $40. Remember, we want this stock to move higher. Support levels will be at $31 and $29. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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