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GM, Auto Stocks Gain Traction

December 27, 2010
3 min to read


NEW YORK - Options traders were driven toward auto-related companies Thursday, putting on positions that would benefit from gains in the shares of companies including General Motors, O'Reilly Automotive and CarMax, reported The Wall Street Journal.


GM's shares hit their highest intraday level Thursday since the auto giant's Nov. 18 initial public offering, and call contracts, which convey the right to buy shares, indicated traders are betting the stock could surpass the IPO-day highs in January.

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Traders were putting on new positions in January $37 calls priced at 30 cents that turn a profit if GM's stock climbs above $37.30 by Jan. 21. GM's IPO priced at $33 in November and climbed as high as $35.99 on Nov. 18, but it has not traded that high since then. Thursday, the stock closed down 0.3% at $34.81, although it hit an intraday high during the session of $35.52.


The activity came a day after Edmunds.com said the U.S. annual sales rate for new vehicles will rise in December and reach its highest level of the year, while nearly all major auto makers are expected to report higher sales from a year ago. The picking up in U.S. new-vehicle sales comes after the industry suffered mightily during the financial crisis.


Options activity in auto-parts retailer O'Reilly Automotive and used-car retailer CarMax also indicated improving investor sentiment toward companies connected to the auto industry.


"It would be kind of a stretch to say there's bullish activity, but there's increasing interest in the sector and heightened activity," said Frederic Ruffy, an analyst at WhatsTrading.com. "There's an expectation that auto makers will do better in 2011."


O'Reilly had elevated volume in February $65 calls priced at 70 cents, which turn a profit if the stock climbs above $65.70 in the next two months. O'Reilly stock fell 1.6% to $60.24 Thursday.

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CarMax, meanwhile, experienced increased volume in January $34 calls priced at 50 cents that make money following a stock rise above $34.50, as well as in January $35 calls at 29 cents that profit from moves above $35.29.


CarMax shares rose 0.9% to $32.59 on Thursday. CarMax is down 8.2% for the week after its shares tumbled on Tuesday following the company's fiscal third-quarter earnings report. While the company's quarterly profit rose 10%, topping analysts' estimates, stock investors appeared to have been hoping for more given a 34% jump in the shares this year.


Options activity was also pronounced in Jo-Ann Stores, with volume elevated in put contracts that convey the right to sell shares even as the stock soared on a buyout agreement.


The fabric and craft retailer agreed to be acquired by private-equity firm Leonard Green & Partners LP for about $1.6 billion. Jo-Ann holders would get $61 a share under the buyout bid, a 34% premium to Wednesday's closing price, and the stock climbed 32% to $60.19 on Thursday.


Options traders were putting on positions that would become profitable from stock moves below $60. There was heightened volume in January $60 puts priced at 29 cents, which would profit from a move in the stock below $59.71. Traders were also attracted to April $55 puts priced at 25 cents, which would turn a profit if the stock falls below $54.75 by April 15.

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Still, Mr. Ruffy said the bets appeared to be more for protection rather than bearish.


"It could be people that are hedging their bets," he said. "If someone had a position in the shares prior to today and the stock suddenly makes a big move, they might be buying puts just to protect those gains if for some reason the deal falls apart."

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