General Motors (GM) had a very bullish close yesterday and is back above the all-important 21 and 50-day moving averages. Here’s a bull call spread for GM stock that takes advantage of its currently low implied volatility.
Implied volatility is a useful metric to tell you whether it’s better to be a net buyer or seller of options.
Implied volatility on GM stock is 30% which is the lowest level we’ve seen in the last 12 months. That simply means options are cheap compared to the last year.
One way to trade the stock from the long side in a defined risk way is using an option strategy known as a bull call spread.
Bull Call Spread Option Trade On GM Stock
A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to June expiration, a call option with a 58 strike traded around $1.85 yesterday. The 63 call was around $0.40.
Into options? Give us your feedback on the daily trade ideas.
Buying the 58 call and selling the 63 call creates a bull call spread. The cost of the trade would be $145 (difference in the option prices multiplied by 100) and the maximum profit potential would be $355 (difference in strike prices, multiplied by 100 less the premium paid).
Risk And Rewards
A bull call spread is a risk-defined strategy, so if GM stock closes below 58 on June 18, the most the trade could lose is the roughly $145 premium paid.
Potential gains are also capped above 63, so no matter how high GM stock might go, the most the trade could profit is $355.
Trading a bull call spread can be an easier way for smaller traders to gain bullish exposure to GM stock using options.
In terms of trade management, if the spread dropped from $1.45 to 70 cents, or if the stock dropped below 56, I would consider closing early for a loss. Otherwise, I would hold to expiry.
Always remember that options are risky! Investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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View more information: https://www.investors.com/research/options/how-to-benefit-from-low-implied-volatility-on-gm-stock/