GM: Expect More Short Covering 33 comments
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GM, now trading as GMGMQ.PK, is currently $1.65 in the pre market. I had previously thought that the opportunity for a short squeeze had passed early last week, but it appears that once again I was wrong. GM has rallied 500% from its 27 cent low on June 1.
There are several reasons for the move. One which I mentioned before was the very high cost of borrowing GM shares to maintain a short position. The longer the GM bankruptcy lasts, the more it costs to stay short. Shorts could be paying 50 to 75 cents per month to borrow. It is simply cheaper to cover.
Another reason is the GM call options expiring on June 20. The $1.00 strike calls have been sold short in large numbers by traders expecting GM to quickly become worthless (see the comments in my previous post "GM may be worth more than you think"). Since these call options frequently trade at small discount to their intrinsic value, trading desks buy the option, call the stock and sell it for a profit.
That leaves the trader who was short the call short but unable to borrow. So, he must buy GM in the market immediately. I am sure that trading desks at major firms are aware of this and with their advantage of being able to see their customers positions, they are trading GM in a way to maximize the pressure on the traders that are short GM and short GM calls.
As Keynes said: "the market can stay irrational longer than you can stay solvent."
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This article has 33 comments:
I am short on GM and didn't hop off on 50 cents because I thought it would go towards zero.. Now , I am not bleeding right now because I am hedged, so I can wait.. But what really puzzles me is what you say about the cost to stay short.. Currently, my broker is not charging me anything, he is just asking for a very big collateral.. Since the stock is below 5 dollars, the account should have 5 dollars per each stock shorted.. So , if I am short on 10.000 GM stocks, I should have 50.000 dollars cash as a collateral, nothing else.. So I don't get what do you mean by the 50 to 75 cents a month....
All of this is detailed in the court filings at gmcourtdocs.com, and in extensive SEC filings available on our investor site.
On Jun 10 10:13 AM TomWilkinsonatGM wrote:
> I won't comment on the specific activites you mention, but just a
> reminder for your general readers that current GM stock will become
> stock in the "old GM" should the 363 sale occur as expected, and
> old GM will be wound down in a chapter 11 process. The "new GM"
> that will emerge will be owned largely by the U.S. government, Canadian
> governments, and UAW VEBA. Old GM will initially own just 10% of
> the new company.
>
> All of this is detailed in the court filings at gmcourtdocs.com,
> and in extensive SEC filings available on our investor site.
If I was short GM, I would check to verify how much I was being charged to borrow the stock.
If I was short and wasn't being charged for the "borrow" I would stay short, but I would know that I was taking a risk of a painful squeeze.
Thank you for your insightful article. One reason that you cite for the run-up in the price of GMGMQ shares is that institutional traders may be buying-up June $1.00 calls and then calling the stock, forcing the sellers of the calls to cover immediately.
A quick calculation of the open interest in ALL $1.00 calls shows that the total number of shares controlled by open $1.00 calls is only about 5% of the float. Open interest in June $1.00 calls is only about 2.5% of the float.
Assuming that my arithmetic is correct, could such a relatively small quantity of shares be a material factor in the price run-up that we've seen? (And I don't have a better explanation!)
Thanks!
On Jun 10 11:14 AM Gerry Sullivan wrote:
> If I owned GM stock, I would sell it now. Right here. At the market,
> currently $1.60.
>
> If I was short GM, I would check to verify how much I was being charged
> to borrow the stock.
>
> If I was short and wasn't being charged for the "borrow" I would
> stay short, but I would know that I was taking a risk of a painful
> squeeze.
I also agree with User 429213.. I don't think this is short covering... Last time I checked GM's short interest was around 115 m , little compared to the 600 m floating... And if you also take into account what the User 429213 , the thing doesn't add.
By the way, I would also appreciate if you have an answer as to why GM's exchange traded retail bonds are not trading (Such as BGM).. It is completely unfair and plain wrong.. Normal bonds are trading but not the retail ones..
On the other hand, being a (relatively small) holder of June puts, I will now bend over and assume the position. Dang.
Any insights from others regarding whether or not this is common practice? My brokerage agreement does not include any rules or restrictions relevant to this case.
Are traders just moving in and out of the stock on short-term speculation, hoping that they have a chair when the music stops?
Not happening. No new positions in GM options are allowed, only closing trades:
www.cboe.org/publish/R...
On Jun 10 03:59 PM Trader C wrote:
> I'm also suspicious of the "short covering" explanation ... the volumes
> just seem too high relative to the float and the short interest.
> But I can't imagine any reasonable person buying stock on the belief
> that GMGMQ will worth more than a few pennies post-bankrupcy. <br/>
>
> Are traders just moving in and out of the stock on short-term speculation,
> hoping that they have a chair when the music stops?
media.gm.com/servlet/G...
GM Statement re: recent changes in GM stock price and volume
GM management has noticed a recent elevation in the volume and price of its common stock. While GM does not control the market or its stock price, GM management strongly believes that any recovery for the common stockholders in the chapter 11 bankruptcy process is highly unlikely, even under the most optimistic of scenarios. Stockholders of a company in chapter 11 generally receive value only if all claims of the secured and unsecured creditors are fully satisfied.
# # #
Forward Looking Language
This news release and management's comments on it contain “forward-looking statements.” These statements are based on GM management's current expectations and assumptions, and as such involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those that we now anticipate – both in connection with the chapter 11 filings we made on June 1, 2009 and GM's business and financial prospects. Those risks are described in GM’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 which was filed March 5, 2009, GM’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 which was filed on May 8, 2009, GM’s Current Reports on Form 8-K and other GM filings with the Securities and Exchange Commission
Since no opening positions are allowed in the GM calls, the floor traders don't have to compete with speculators who would be bidding for the calls. That causes the calls at the $1.00 strike to trade a penny or two below intrinsic value. When an owner of a long call sells only a floor trader or specialist can buy.
Of course, the specialist doesn't want to be long calls on GM, so he calls the stock. That causes someone else who has a short position to be exercised, leaving that person short, unable to borrow, and must buy GM. That buy puts upward pressure on the stock and the $1.00 strike calls.
These bonds should be trading around the same % of par level as the $1000 par bonds. That is 11 cents on the dollar or around $2.75 per $25 par formerly listed bond.
A broker should be able to get a bid.
The "float" isn't 600 million shares, it is some lesser number.
115 million shares short is a lot. I think trading desks of major firms and/or hedge funds bought stock to squeeze. The trading doesn't look like the guy with a $25,000 account at Etrade.
When GM went thru $1.00, there were many large trades, often 1 million shares or more. This looked like professional buying to me.
This is a game of musical chairs. The pros buying the GM will have a seat when the music stops.
If you're right that large institutional buyers picked up massive quantities of GM in order to cause and exploit a squeeze (and this is the best explanation that I've heard so far, given the data) then we should expect a viscious sell-off when these big institutions decide to dump their long positions.
Regarding the float, public sources (like Capital IQ) state the float is 603 million shares.
on pinksheets? couldnt find any info so far.
thanks in advance.
Here is a link to the site:
www.pinksheets.com/pin...
In the search box enter: general mo
You then have to click on the various securities to see the description.
There are no quotes, but we now from the trading level of the $1000 par bonds that these would be trading around $2.70- 2.80.
there is a technicality regarding quotes on corporate bonds - the price excludes accrued interest. So if a bond is quoting at 10 cents, the buyer actually has to pay 10 cents + accrued interest. Unless the quotes are nay different for bankrupt companies, the bonds are actually being traded at 13-14 cents (10 cents + half yearly interest of 3 to 4 cents).
can someone throw some light on this issue?
I have some bond shares of the old BGM. What will happen if I don't sell them. Will I lose everything once GM gets out of the bankruptcy? Or it still worth around $2.7-2.8 per share then?
On Jun 14 10:01 PM Gerry Sullivan wrote:
> The GM bonds trade "flat." No accrued interest. The $25 par listed
> bonds always traded without accrued interest. Now, all the GM bonds,
> including the $1000 par bonds, trade without accrued interest.<br/>
I have thought since I made my first comments on GM, that the value of the shares in the "new GM" that the bondholders receive will be worth more than the price that the bonds are trading for. I still believe that.
Right now the plan calls for GM bondholders to own 10% of GM and also get warrants to acquire additional shares. You can do a search and get the specific details.
Right now the trading on the $25 par bond formerly traded as BGM is around $2.75 - 3.00. I derive that from the levels of bids and offers for the $1000 par bonds.
I have thought since I made my first comments on GM, that the value of the shares in the "new GM" that the bondholders receive will be worth more than the price that the bonds are trading for. I still believe that.
Right now the plan calls for GM bondholders to own 10% of GM and also get warrants to acquire additional shares. You can do a search and get the specific details.
Right now the trading on the $25 par bond formerly traded as BGM is around $2.75 - 3.00. I derive that from the levels of bids and offers for the $1000 par bonds.
I have thought since I made my first comments on GM, that the value of the shares in the "new GM" that the bondholders receive will be worth more than the price that the bonds are trading for. I still believe that.
Right now the plan calls for GM bondholders to own 10% of GM and also get warrants to acquire additional shares. You can do a search and get the specific details.
Right now the trading on the $25 par bond formerly traded as BGM is around $2.75 - 3.00. I derive that from the levels of bids and offers for the $1000 par bonds.
I have thought since I made my first comments on GM, that the value of the shares in the "new GM" that the bondholders receive will be worth more than the price that the bonds are trading for. I still believe that.
Right now the plan calls for GM bondholders to own 10% of GM and also get warrants to acquire additional shares. You can do a search and get the specific details.
Right now the trading on the $25 par bond formerly traded as BGM is around $2.75 - 3.00. I derive that from the levels of bids and offers for the $1000 par bonds.
On Jun 10 01:17 PM Hernie wrote:
> Thanks for the answer Gerry...
>
> I also agree with User 429213.. I don't think this is short covering...
> Last time I checked GM's short interest was around 115 m , little
> compared to the 600 m floating... And if you also take into account
> what the User 429213 , the thing doesn't add.
>
> By the way, I would also appreciate if you have an answer as to why
> GM's exchange traded retail bonds are not trading (Such as BGM)..
> It is completely unfair and plain wrong.. Normal bonds are trading
> but not the retail ones..
Looking at bids and offers on the $1000 par bonds shows a typical market of 10.5 bid 13 offered.
.........................
Yep I did... I found them on FINRA... look up for them on the watchlist by their CUSIPS...
On Jun 11 07:27 AM Gerry Sullivan wrote:
> CBOE...thanks for the info. It actually supports the explanation.
>
>
> Since no opening positions are allowed in the GM calls, the floor
> traders don't have to compete with speculators who would be bidding
> for the calls. That causes the calls at the $1.00 strike to trade
> a penny or two below intrinsic value. When an owner of a long call
> sells only a floor trader or specialist can buy.
>
> Of course, the specialist doesn't want to be long calls on GM, so
> he calls the stock. That causes someone else who has a short position
> to be exercised, leaving that person short, unable to borrow, and
> must buy GM. That buy puts upward pressure on the stock and the
> $1.00 strike calls.
The current price of GMGMQ takes into account:
1) the cost to borrow GM stock to remain short
2) the estimated but unknown rate of time decay on GMGMQ
3) end value of GMGMQ, if any.
Think of an institution or hedge fund that owns 1 million shares of GM. The can sell it today for $1.16 or they can loan it to a short seller and get, let's say, 50 cents a month for the loan.
What would you do? It's like owning a slum with very high rent.