General Motors Strike Unleashes Frenzy of Options Trading

The strike at

General Motors


GM -1.09%

Co. this week unleashed a flurry of trading in the company’s options, with some investors bracing for extreme moves in the stock. Volumes on GM options hit the highest level since July on Thursday, according to data provider Trade Alert. The United Auto Workers called its first strike in more than a decade earlier this week. Workers and the company are split on health-care benefits and pay, among other things, a rift that analysts estimate could crimp GM’s profit by up to $100 million daily. The strike has translated to pain for GM shares, which have dropped 3.8% this week through Friday, underperforming the S&P 500, which slipped 0.5%. Shares fell 1.1% on Friday to $37.37.

Some options traders are girding for an even bigger fall for the company’s shares amid the slide. The longer the strike goes on, the more financial damage it will do to the company. “Beyond the initial one to two weeks, the financial burden of a strike will become more material,” Moody’s Corp. analysts wrote this week. The most actively traded contracts Thursday were bearish put options that would pay out if the shares dropped to $33 by December, Trade Alert data show. That would amount to about a 13% fall from Thursday’s close of $37.78. The ratio of bearish options to bullish options outstanding is also currently elevated. Investors can use options to hedge other parts of their portfolios or make directional bets on a stock. Put option contracts give the right to sell shares later in time. Calls confer the right to buy shares. “I think of it as a pure hedge,” said JJ Kinahan, chief market strategist at TD Ameritrade. “You don’t necessarily know what they have on the other side.” Still, others appeared to be positioning for a rebound or betting that volatility in the shares will recede. Another active contract Thursday was a call option tied to the shares jumping to $42, Trade Alert data show, an 11% advance from that day.

The longer the strike at General Motors goes on, the more financial damage it will do to the company.

Photo:

Jim West/Zuma Press

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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