Daily Stock Market Equity and Options Trading Commentary

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Friday, May 15, 2009

Will GM Make it? A Look at the 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, and recent news breaking that General Motors (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 pre-market 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 (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 pre-market 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.

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