A Bet On GM Bankruptcy

by Manshu on May 22, 2009

in Investments

Post image for A Bet On GM Bankruptcy
Image by Marcandrelariviere

Last Tuesday, FT ran a story about the chances of GM’s bankruptcy looking very high and Bloomberg said that a GM bankruptcy was inevitable.

Bankruptcy inevitably means that the shareholders will be wiped out and the stock price should go down to zero.

The stock that day traded at about $1.15 and I heard three main reasons for the stock being higher than zero:

  1. People were covering their shorts.
  2. There was an outside chance that the government or the creditors will change their mind and GM will not have to declare bankruptcy.
  3. People were being stupid.

I don’t trade in Options very frequently, but, that day, for some reason, as I was checking my brokerage account – I looked at the Put Options for GM.

This is the most interesting contract that I saw:

Symbol: .GMQV

  • Base Commission: $9.95
  • Contract Charge: $1.50 per contract
  • Quote: $0.13
  • Strike Price: $1.00
  • Market Price: $1.15
  • Expiry Date: 05/16/2009
  • Today: 05/12/2009

Now, since the Option expired in four days – the stock could hover at a buck for four days and then go down to 50 cents or something on the fifth day and I would have still made a loss. But, somehow I just got into this contract.

Normally, I don’t get into any trades that depend on the misfortune of someone else (like tobacco stocks) or other things. And the problem with making pennies on such speculative bets is that you could get ten rights and make a few dollars and then one wrong bet will blow up in your face and wipe out all your profits.

I felt the strong urge to get in the trade and I thought I’d just bet a small amount so I just bought some 7 contracts, so the amount that I could lose would not exceed a 100 dollars. As usual, I lost money on this bet because the stock just hovered around that price and I sold the contract at six cents. I lost a little money, but, this should keep my gambling instincts at bay for some time now.

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