Full index of posts »
StockTalks

Time for profits... I can raise cash and be patient or pay down debts as I wait for a corrction. Nov 18, 2013

Ugly weekly candle stick with slightly heavier volume... Use caution Jul 28, 2013

$SPY $SPX put in a doji for the year... I'm expecting a huge range and a +/ 25% move either way this year Jan 2, 2012
Latest Comments
 kaco on Time for A Technical Bounce? Time for A Bullish Option Strategy In retro respect, excellent call.KACO the Nethe...
 TraderGirl on Bull or Bear Market Ahead? Who Cares, Profit from a Rising or Falling Stock Market Very nice
 Shabroo on Why 4 is my lucky number Beautiful, love the strategy.
Will GM Make it? A Look at the Probability Using Options 0 comments
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, and recent news breaking that General Motors (NYSE:GM) and the UAW are nearing a crucial deal, 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. For more information on options trading click here. As of Thursdays close GM's stock was valued at $1.15 a share.
Below are the current probabilities (prices and probabilities as of premarket May 15, 2009):
Expiration, $1, $2
May 2009, 86.8%, 4.8%
June 2009, 71.9%, 26.6%
Sept. 2009, 70.7%, 30.8%
Dec. 2009, 70.2%, 35.1%
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, 30.9%
January 2011, 41.3%
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 $20 per contract (20 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 May is 4.1%, which may seem very odd as GM would have to shoot up by nearly 74% from Thursday's close. The 30 day historical implied volatility is extremely high which explains this probability.
Similarly for Ford (NYSE:F) we can analyze the probabilities for the stock to close at or above the nearest current value ($5.16) and double that.
Expiration, $5, $10
May 2009, 70.8%, 1.9%
June 2009, 60.4%, 4.0%
Sept. 2009, 63.8%, 16.7%
Dec. 2009, 66.1%, 26.1%
January 2010, 67.5%, 28.7%
January 2011, 75.3%, 49.0%
I find it interesting that the options market is factoring in a 49% chance that F will close at or above $10 on the expiration in January 2011, when Ford's stock has not been at or above $10 since mid 2005.
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 premarket Friday May 15, 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.
Disclosure: No positions
Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.
Share this Instablog with a colleague