While the American auto industry will never again be the engine to drive the U.S. economy, the outlook continues to brighten. Kelley Blue Book is forecasting auto sales to reach 16.3 million units this year – a 4.9 percent increase from 2013′s 15.6 million units.
Within the sector, I think General Motors is an attractive play. The stock has a two year price support at $30 form the 2012 low to the 2013 high. A recovery to the $42 highs in GM from this recent pullback to $34 projects a measured move to $50. With the current price at $36.60 that objective is 35% plus above. Only a weekly close below $30 would negate the technical pattern.
A General Motors long dated call option can provide the staying power in a potential larger trend extension. More importantly, the maximum risk is the premium paid.
TRADE SETUP
Buy the January 2015 GM $30 Call at $7.40 or less.
A close below $30 on a weekly basis or the loss of half of the option premium would trigger an exit. The maximum loss is limited to the $740 or less paid per option contract. The upside, on the other hand, is unlimited. With this stock substitution strategy this option delta is 80% to act much like the stock with limited risk and staying power.
The GM option trade breakeven is $37.40 at expiration ($30.00 strike plus $7.40 option premium). That is just 75 cents above General Motors current price. If shares hit the $50 price target, there would be a potential 145% gain on the initial investment.
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