Many US options investors, anxious about the longer-term prospects of General Motors Corp, continue to buy insurance to protect against a possible big drop in the automaker's stock, market watchers said.
Put volume in GM across the six US option exchanges swelled on March 31 after former GM parts unit Delphi Corp moved to void its US labour contracts, earning a caustic warning from the United Auto Workers that a long strike could not be avoided if Delphi imposes wage and benefit cuts.
Strikes could quickly shutter Delphi's US operations - and GM's - at a time when the world's largest automaker is releasing key new models and prepping its own broad restructuring.
"What is happening is the likelihood of potential bankruptcy in GM has increased," said Herb Kurlan, president of Vtrader Pro, an online trading firm in stock options and futures based in San Francisco.
Kurlan noted a large portion of the put demand in GM is coming from bond holders.
"Bond holders recognise the fact that if their bonds are under pressure because of bankruptcy, the stock has to lose all of its value first. So therefore, they will make money on their puts to offset their potential bond losses," Kurlan said.
Late on March 31, a total of 220,201 options traded in GM - dominated by more than 176,000 puts, which give the right to sell company shares at a predetermined price within a specified time period. The robust options volume was nearly three times its normal turnover of 79,259 contracts, according to market research firm Track Data.
"People are buying puts either to protect their stock positions or to take advantage of potential future problems at GM," said William Lefkowitz, an options strategist at brokerage firm vFinance Investments.
Particularly notable have been the long-term puts, or LEAPS, that give the right to sell GM stock at $10 a share by mid-January 2007. Those puts are out of the money or far from GM's current stock price of around $21.
Near Friday's close, GM shares were up more than 1 percent to $21.29 on the New York Stock Exchange.
Trading in the GM January 2007 10 puts was more than 61,000 contracts late on Friday on previous open interest of 491,822 contracts. Those contracts cost $1.05 apiece on the International Securities Exchange, down 5 cents from Thursday.
GM January 07 puts with strike prices ranging from 20 to 10 were also active.
"This seems to be more defensive positioning by investors and in the case of the January 10 2007 puts, this looks like they are paying a premium for disaster insurance," said Frederic Ruffy, an analyst at Optionetics, an investment education and analysis firm.