GM's Longer-Term Picture
GM stock has struggled this year, but a wider view tells a different story. Over the last 3 years the stock is up nearly 95%. A 3-year weekly chart shows shares traded below $40 three years ago, then made sharp moves higher. This year that climb has flattened out.
A big driver of the rally: over the last 5 years the company bought back and retired about $30 billion of its own stock, roughly 500 million shares. Free cash flow feeding those buybacks has supported the shares.
The Setup Going Into Earnings
On a 1-year daily chart, the stock is still up 43% from a year ago, a strong 12-month run. For the past several months it has been stuck in a consolidation phase between two lines: the 50-day moving average (light blue) and the 200-day simple moving average (magenta/purple). It has bobbed in a tight range between $76 and about $79.
Momentum: the RSI sits just below the 50 level, with a small pullback recently, still inside the range, so a bounce is possible.
Implied volatility is high heading into the report. The key question is whether this tight range keeps going after earnings, or whether earnings the next morning act as a catalyst that pushes the stock outside the band.
The Trade
The plan trades the consolidation and takes advantage of the high implied volatility. The IV percentile rank sits near 70%, meaning IV is in the top three-fourths of what it has done over the last 52 weeks. High IV inflates option premiums. After earnings, IV should drop sharply, a "vol crush," which lowers the price of the position so it can be bought back cheaper.
This is a neutral strategy, a short iron condor, also called a short iron butterfly. It uses the July 24th weekly options, a very short-term earnings play. The option market priced in a move of about plus or minus 6%, roughly $4.50 up or down after earnings. The stock is set to open around $76.50.
The structure sells a straddle on the 77 strike (sell the 77 call, sell the 77 put) and, to keep risk defined, buys a strangle in the same July 24th weeklies: buy the out-of-the-money 72 put and buy the out-of-the-money 82 call. That makes a $5-wide neutral iron butterfly.
The numbers:
- Credit collected: about $3.75, or $375 per spread.
- Risk: about $125.
- Max loss: below 72 or above 82.
- Break-evens: 73.25 on the downside, 80.75 on the upside.
The risk-reward is good, but the stock needs to stay quiet and keep consolidating over the next 4 days. You sell the butterfly for the $3.75 credit and hope to buy it back cheaper after the vol crush pulls down both the volatility and the price.
