Daily Stock Market Equity and Options Trading Commentary

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Friday, May 29, 2009

GM Bankruptcy? The Probabilities of $1 and $2 Stock 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. For more on stock options and options pricing click here. 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 Junes 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.

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Chris said...

Dear Macro,
How do you get the probability figure ? Based on IV% ?
Looking forward to your reply.

Marco H said...

The calculation is derived from the Black-Scholes model.

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