GM Bankruptcy? Probability Using Options

The options market is one of many ways to get an idea of where an individual security may be at a set point in time. The way you can find this probability is the calculated Delta value. With Chrysler filing bankruptcy May 1, and General Motors' (GM) deadline approaching on June 1, I thought it would be interesting to see what the options market is factoring in. I observed the probabilities for GM's stock price to close at or above $1.00 and $2.00 per share, for the following options expiration dates. As of Thursdays close GM's stock was valued at $1.12 a share.

Below are the current probabilities (prices and probabilities as of pre-market May 29, 2009):

• Expiration, $1, $2
• June 2009, 70.4%, 24.8%
• July 2009, 70.3%, 30.0%
• Sept. 2009, 69.5%, 33.1%
• Dec. 2009, 69.5%, 39.8%

NOTE for January Leap Option Contracts the lowest Strike available is $2.50 therefore the next two probabilities will be for the $2.50 strike price.

• January 2010, 28.8%
• January 2011, 35.7%

The current options market is factoring in a very high probability of bankruptcy in GM's future, as reasons may be obvious. Someone could open an option contract to own the rights on GM's stock at $2.50 a share until January 2011 for $17 per contract (17 cents a share premium). Perhaps my most interesting find is the probability that GM's stock will close at or above $2 a share for June is 24.8%, which may seem very odd as GM would have to shoot up by nearly 79% from Thursday's close. The 30 day historical implied volatility is extremely high which explains this probability.

Similarly for Ford (F) we can analyze the probabilities for the stock to close at or above the nearest current value ($5.56) and approximately double that.

• Expiration, $5, $10
• June 2009, 76.0%, 1.1%
• July 2009, 70.3%, 2.0%
• Sept. 2009, 67.8%, 10.4%
• Dec. 2009, 68.7%, 22.7%
• January 2010, 69.2%, 26.0%
• January 2011, 74.7%, 47.8%

Derivative markets are useful to get an idea, but change day to day. No investment or trading strategies should be formed based on options probabilities. As of pre-market Friday May 29, 2009 these are the probabilities of these two auto dealers... Time will tell what the outcome of these companies and their share prices will be.

Comments

[Lazaris:]

The Treasury Dept. believes that beneath decades of financial issues and labor problems is buried an American icon that truly knows how to make great cars.

May 29 09:11 AM

[buds:]

To predict GM bankruptcy using option doesn't have theoretical based, just like to follow herd

And similarity to F? for expiration $5 and $10, F price now is $5,56. Let's see ratio probability from $5 to $5,56 is 0.899 and $5,56 to $10 is 0.556. Which 0.899 is greater than 0.556.

Derivative markets are useful to get an idea, yes you are right but just an idea, just be careful out there

May 29 09:22 AM

[TurtleTrader72:]

With all the volume being traded on GM this week (close ot 7 billion shares) I am surpirsed to see that the stock price has held its ground as much as it has (relatively speaking of course). Usually, when you see such a large amount of volume with only a small move to the down side it means that buyers are willing to step in to take on the sellers. I don't have risk tolerance to buy GM at this point but this technical trading pattern has made me questioned the probability of this bankruptcy. Just a thought.

May 29 10:30 AM

[Harryballs:]

GM and small cars will be its death.

May 29 10:40 AM

[babyray:]

You are seeing the results of NAFTA!!!!

May 29 04:22 PM

[ayleebaylee:]

Since for the past few months a person could have and still can synthetically buy GM stock using options for cheaper than the stock outright, why does GM stock ever have an uptick? I mean for it to uptick somebody has to lift the offer... but if someone wants to buy it why don't they just use options? Is it just because they are unaware? or is there another reason?

May 29 04:29 PM

[Mad Hedge F...:]

It's going down. The imminent demise of General Motors (GM) will be a nail in the coffin for the commercial real estate market, which I believe will be the financial crisis of 2009. Some 2,000 dealers are being axed, dumping hundreds of millions of square feet on to a market that least wants it. These were the guys who sponsored the local baseball team and Girl Scout cookie sales, and their absence will rip the hearts out of hundreds of American communities. Much of this is prime space, near dense populations, with great frontage, adjacent retail space, completed site work, mitigated environmental work, and already zoned for commercial use. Some might get turned into mini malls, but I’m afraid more will end up as indoor climbing walls and paintball battlefields. Commercial real estate sales are off 73% this year, while vacancies have catapulted to 16.7%. Banks have seized 464 properties so far in 2009, including $7 billion worth in March alone, and thousands more are on the brink.

May 29 07:23 PM

[Suncatcher:]

Since I have asking this question of everyone I talk to and haven't yet received a viable answer, I will ask it here; Why does cutting car dealerships add to the manufacturers bottom line? This seems so contradictory I want to bang my head against the wall! The dealerships are independent and even if they aren't making money for their owners they ARE STILL SELLING PRODUCT! Am I living in a parallel universe? Please someone put me out of my misery!

May 30 12:36 PM

[Marco Hickey:]

The dealerships being cut are most likely the weakest... GM spends a lot of money promoting dealerships etc... If the dealership makes GM a profit of $1,000 a day, but GM spends $1,001 a day in promoting etc... GM loses money. I am sure there are a lot of expenses that GM subsidizes for the dealership.

On May 30 12:36 PM Suncatcher wrote:

> Since I have asking this question of everyone I talk to and haven't
> yet received a viable answer, I will ask it here; Why does cutting
> car dealerships add to the manufacturers bottom line? This seems
> so contradictory I want to bang my head against the wall! The dealerships
> are independent and even if they aren't making money for their owners
> they ARE STILL SELLING PRODUCT! Am I living in a parallel universe?
> Please someone put me out of my misery!

May 30 01:02 PM

[mbkelly75:]

That is exactly why the dealerships are being cut. They are cutting costs by doing so and increasing the return from the money spent on the good ones. Some good dealerships are being cut also and I am not sure what the reason is for that. It may have something to do with something like office politics on a really large scale or simply wanting out of certain areas and their markets. I have no real good idea about that.
I do not use options very much, but find this use of them to be an interesting tool. I would not use it to make a decision on a stock all by itself, but it is another good way to help judge whether or not to invest in a given stock. Thank you for the idea.


On May 30 01:02 PM Marco Hickey wrote:

> The dealerships being cut are most likely the weakest... GM spends
> a lot of money promoting dealerships etc... If the dealership makes
> GM a profit of $1,000 a day, but GM spends $1,001 a day in promoting
> etc... GM loses money. I am sure there are a lot of expenses that
> GM subsidizes for the dealership.
>
> On May 30 12:36 PM Suncatcher wrote:

May 30 01:30 PM

[Deweyp:]

Nearly all the dealerships being cut have very low profits and do not enjoy the prime real estate you mention. The prime locations are the ones being kept open, mostly just for that reason. Having called on dealerships in Ohio, West Virginia and Kentucky for many years, I can tell you that less than half would be considered prime locations. In most cases the impact on a community will be barely noticed by that community.


On May 29 07:23 PM Mad Hedge Fund Trader wrote:

> It's going down. The imminent demise of General Motors (seekingalpha.com/symbo...)
> will be a nail in the coffin for the commercial real estate market,
> which I believe will be the financial crisis of 2009. Some 2,000
> dealers are being axed, dumping hundreds of millions of square feet
> on to a market that least wants it. These were the guys who sponsored
> the local baseball team and Girl Scout cookie sales, and their absence
> will rip the hearts out of hundreds of American communities. Much
> of this is prime space, near dense populations, with great frontage,
> adjacent retail space, completed site work, mitigated environmental
> work, and already zoned for commercial use. Some might get turned
> into mini malls, but I’m afraid more will end up as indoor climbing
> walls and paintball battlefields. Commercial real estate sales are
> off 73% this year, while vacancies have catapulted to 16.7%. Banks
> have seized 464 properties so far in 2009, including $7 billion worth
> in March alone, and thousands more are on the brink.

May 30 02:08 PM

[Tradestar:]

What does Citi have to do with this article on GM? Are you considering them in the same category?

Are you saying Ford will likely double? Some think GM's demise will adversely affect Ford as well.

May 30 05:39 PM