This week’s covered call idea is a play on an old-fashioned car company that has been taking bold steps to change the company, and investors’ perceptions of the stock.
Cabot Profit Booster 147
As earnings season ramps up, and with the election just one week away, the market has become a bit rocky. This recent market decline has weighed on two of our stocks (MRVL, PLUG), while our other two positions (OMI, STM) remain in great shape.
And while MRVL and PLUG shares have lost some altitude, big picture those positions are still in fine shape as the premiums we received via our call sale have helped offset the stock declines.
This week’s covered call idea is a play on an old-fashioned car company that has been taking bold steps to change the company, and investors’ perceptions of the stock.
The Stock – General Motors (GM)
Back in March, it was widely feared that shutdowns would decimate the auto industry. But after a rough first quarter, General Motors has mounted one of this year’s most impressive comebacks, thanks to soaring demand for trucks and electric vehicles (EV).
The automaker is focusing on pickup truck production right now, with the latest Chevrolet Suburban, Tahoe and GMC Yukon models having been released to high praise; dealers are reportedly selling them as fast as they can be made, and last month, GM increased its U.S. production to build an extra 1,000 pickups per month.
Yet it’s the company’s push toward EVs that has caused most of the excitement: GM said it will spend $20 billion by 2025 to launch a range of EVs powered by new low-cost, lithium-ion Ultium batteries (predicted to reduce battery cell costs to under $100 per kilowatt-hour). General Motors also recently entered a partnership with hydrogen-powered truck maker Nikola for $2 billion in Nikola stock; as part of the agreement, GMC will build Nikola’s Badger truck using its Ultium batteries and Hydrotec fuel cells.
Then there is GMC’s newly unveiled all-electric Hummer truck, billed as the world’s first all-electric “super truck,” plus a just-announced $2 billion plan for six new U.S. production sites. The firm has also ventured into autonomous vehicles, with the self-driving Cruise becoming the first to be permitted to test driverless cars in San Francisco.
GM is expected to see strong top- and bottom-line results in the coming quarters as pickup and SUV inventory is replenished; analysts see the bottom line rebounding nicely in 2021. Earnings are due November 5.
Technical Analysis
GM spent a long time in the 30 to 40 area before the crash this year, which yanked it as low as 15 in the panic. The rebound back to 32 was swift, but that was followed by what turned out to be a three-month, up-and-down consolidation. And now we see a change in character, with GM bolting to higher highs on excellent volume. As with most stocks, the upcoming earnings report is a risk. Stop - 31
The Covered Call Trade
Buy General Motors (GM) Stock at 36, Sell to Open December 36 Strike Calls (exp. 12/18/2020) for $2.25, or a Net Price of 33.75 or less
Static Return: $225 per covered call (6.66%)
Breakeven: 33.75
Covered Call Return (if assigned): $225 per covered call (6.66%)
Potential dividend captured $0.38
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 33.75 or less. (In this case 36 minus 2.25 = 33.75. Or another example is you could pay 35.80 for the stock and sell the call for 2.05, which also equals 33.75)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
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