1:30pm (EST)
Just wanted to add something to the blog below. The GM June 1 puts (GMVR, $0.61, up $0.07) have traded nearly 100,000 contracts as open interest has swelled to over 425,000 contracts. The put options opened at 57 cents today. The action is amazing and it remains to be seen what the outcome of a GM bankruptcy will mean for the market. Monday could be nasty for the market once the news is official.
12:50pm (EST)
General Motors (GM, $0.88, down $0.24) is under a buck and the writing on the wall will now be read by all on Wall Street. Two things I want to talk about. One is DO NOT buy the stock. Some people seem to believe that if they buy the stock and own it now, they own it when GM comes out of bankruptcy. That is not the case.
I remember years ago when I wrote about Kmart. The discount retailer entered Chapter 11 in 2002 and emerged from bankruptcy protection in 2003 with new stock. Kmart was a victim of Wal-Mart (WMT, $49.30, down $0.25) and Target’s (TGT, $38.65, down $0.49) success and GM failed to change when it should have changed 10 years ago. Some people wrote me asking why their old Kmart stock that had traded to zero wasn’t worth what the new stock was trading for.
This is actually a pretty common event when companies enter bankruptcy protection but when they reemerge, the new stock replaces the old stock and you have no ownership. As an owner of the stock right now, you will be the last in line for any “remaining assets” in case of a default or other business failure.
The other point I want to make is who will replace GM in the Dow? Names being mentioned are Aetna (AET, $26.79, down $0.01), Cisco Systems (CSCO, $18.24, down $0.27) or Goldman Sachs (GS, $143.22, down $1.43). There is also a push to add a transportation name like FedEx (FDX, $54.38, up $0.80) or United Parcel Service (UPS, $50.21, up $1.20).
My bet is Goldman as they will be one of the first, if not first, large bank to hand back TARP money, and will benefit from the increased capital markets activity. Whoever it is, there will be a sweet option trade on it that’s for sure. Once GM is dropped, brokerage houses, mutual funds and pension plans will be active in whoever replaces GM.
I also wanted to mention the move Freeport McMoRan (FCX, $53.73, up $1.52) has made over the last three days. The stock hit a low of $46 on Wednesday but has challenged double nickles today (high $54.45). I had mentioned a few call options on May 20th that have now turned positive. That was one of the last trades I covered before announcing our new trading service.
There was a slew of action this week and there were numerous trades that I wanted to talk about. We are still going to get some amazing price swings and stories in the stock market for the rest of the year. Our goal is to teach you what to look for and how to get a feel for the market so that you will be able to find your own trades.
We are going to be offering quite a few different strategies in our new trading service. There will be ultra-safe trades that aim to make you 5%-10% a month and the more riskier trades that can double or triple your investment. I had one reader email me today and said he invested $280 in Dendreon (DNDN, $22.28, up $0.28) call options and it turned into $7,700.
The best part though is that I will be showing you what to look for the next time Dendreon makes the list for an option trade. There will be some more action in Dendreon down the road and you will want to be there. You can by subscribing to the new service.
That’s it for today, but I really encourage you to send me an email over the weekend if you are interested in the program.
Rick Rouse
Rick@OptionsMentoring.com
