General Motors (GM, $10.50, down $1.25) has been insane over the past 24 hours. Tuesday, the stock ended the session at $11.75 after surprising everybody with the “Statue-of-Liberty” play and posted stronger-than-expected sales for June. When the news hit, shares shot up 10% to a high of $13.22.

The market came to its senses after the euphoria wore off and soon realized that a 20% drop in sales is not really anything to cheer about. GM reported an 18.2% decline to be exact in light vehicle sales. Cars sales tumbled 21.1% while trucks declined 16%.

The stock’s 2% gain yesterday has been erased today after Merrill Lynch (MER, $31.55, down $0.70) downgraded GM to “Underperform” from “Buy” with a $7 price target. Ouch! Merrill went on to say that GM would need to raise as much as $15 billion in cash and bankruptcy is “not impossible” if the U.S. auto market continues its recent ways.

The GM July 10 puts (GMSB, $0.73, up $0.35) have rebounded strongly today, up 50%. These were profiled at $0.59 and are profitable but what a ride. This is still a risky position but GM should continue its trend lower now that the “surprise” is out of the way.

Side Notes:

The Ford (F, $4.58, down $0.13) July 6 puts (FSI, $1.50, up $0.10) were closed at $1.25 but continue to do well. These calls were profiled at under $0.50 so the trade has netted some of you 200%.

On Monday I mentioned the Merrill Lynch July 32.50 puts (MERSA, $2.64, up $0.39) at $2.15. Were are up about 20%. You could set stops 5%-10% higher than your entry price but Merrill ain’t smelling like a rose right now, either. The company is getting its own downgrade from Oppenheimer as they believe Merrill will now post a loss for the quarter and for 2008.

Rick Rouse