We're pounding the table on this Auto Maker

The first two weeks of 2016 have been bumpy and firmly in the red with the S&P shedding close to 100 points from 2040 to 2033 in 8 trading sessions. We have been hesitant to go long anything since just before year end, and we see a bright spot worth mentioning. We’ve been watching the auto industry and see good value in General Motors since reaching a recent low of $29.42. Shares currently trade at $30.95, and today GM guided earnings higher and increased the share buyback program. Two great signs of management’s confidence in the business, and stability in the financial outlook amidst global and currency volatility.

We can play this situation in GM several different ways, one on an absolute basis correlated to GM through options, and another on a relative basis with a paired trade against Ford (F). The option trade that we like is to buy the January 2017 $35 Call on GM for $1.70, and sell the January 2017 $25 Put for $1.75, resulting in a net credit of $0.05 cents. We’ve had a lot of success with this strategy, and would pound the table on this trade! If you want some protection from a massive collapse in the market, then you could additionally purchase a Put option at a lower $23 or $20 strike. If GM trades down to the low 30’s it would be an absolute bargain considering it trades today for 11.4x earnings, and pays a 4.9% dividend.

If you wanted to take a different approach you could put on a paired trade by going long GM, and short Ford. The chart below shows the relative performance of both companies, and you can see two stocks are beginning to diverge again with GM outperforming Ford by 6% over the past 1 year. We aren’t putting this trade on, but if you felt that the market was toppy and we could be in for a 10%+ overall decline, a paired trade makes sense since both companies should track each other closely for during spikes in volatility.