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JPM Attempts To Create An HFT Feeding Frenzy In GM Options At Expense Of Ford

Tyler Durden's picture




 

In a bid to preserve groupthink, and to finally let Getco off the hook from going chapter if GM's price were to ever drop below $33, JPM's Equity Derivatives desk led by Adam Rudd, who is recommending a trade based on Himanshu Patel's view that GM is massively undervalued, has just come out with a trade recommendation to buy GM March $38 calls funded by selling Ford $17 calls. After all can't let a government funded post-reorg story ever go to waste. And for JPM's functioning retard clients, here is the trade's explanation: "We believe that this trade may be particularly attractive for those investors who anticipate outperformance of GM relative to Ford." One quick look behind the scenes indicates that this call is nothing more than a less than glaringly obvious attempt to recreate the options trading frenzy seen in Ford stock in mid/late October in GM, now that Ford derivatives mania is over.

From the report, which seeks to open a new room in the 2011 hedge fund hotel, which is already chock full with a variety of other names, but most notably Apple, which has been occupying the presidential suite for two years now...

We recommend buying March $38 (~103%) calls on GM for $1.55 (~4.2%) and selling March $17 (~101%) calls on Ford for $0.91 (~5.4%) for a net credit of around 1.2%. This strategy is known as a call switch trade (selling a call on one stock to fund a call on another stock). In this way, an investor has a long GM/short F position, in a rally. If both stocks are below their respective strike prices at expiry, the investor would simply retain the 1.2% net premium that is received upon entering the trade. Figure 1 shows the scenarios (GM and Ford share price moves between now and March expiry) under which the call switch trade would generate either a profit or a loss.

What is surprising is that while JPM is obviously going all out on GM, it is throwing out that other momentum driven name, F, which is likely about to see a short-term top based on this call:

 

This option strategy would provide a positive return if the Ford share price is at or below the $17 strike at March expiry and/or if GM outperforms Ford by more than 0.6%. This figure represents the difference between the 1.2% net premium received and the % spread between the relative strikes (the GM call is 3.1% out-of-the-money while the F call is only 1.3% out-of-the-money). If both stocks are below their respective strike prices, the net 1.2% premium would simply be retained.

In Figure 2 we show the relative strike for the calls on both stocks. In order to make the time series comparable, we set the Ford share price equal to 100 on December 31, 2009 and then set the GM level (based on the GM closing price on the stock’s first day of trading, November 18, of $34.19) equal to the Ford level on that date (161). Since then, GM has slightly outperformed Ford, up 7.8% compared to Ford up 4.2%. The dotted lines show the relative strikes for the respective call options. Investors would receive a net premium of 1.2% of notional for selling the Ford March $17 call and at the same time buying the GM March $38 call. The dotted blue line reflects the GM strike relative to the current share price after adjusting for this net premium.

And luckily for latency-arb traders based out of Chicago, the liquidity in the options is great enough to even accomodate HFT strategies. We are confident GM options will be the next flash crash strange attractor once the HFT "DMMs" take over. In fact, as the chart below shows, the plunge in F option liquidity simply means that the whole point of this recommendation is to attempt to recreate the same option HFT feeding frenzy seen in late October in Ford options.

The average daily options value traded for GM since options on the stock started trading on November 29, 2010 is around $140m. During this time, the outstanding open interest for calls and puts for all listed maturities has increased steadily to around $1.4bn (see blue lines in Figure 3). The average daily options value traded for Ford remains higher than that for GM: the average daily options value traded for F since November 29 is around $185m and over the last year has averaged around $200m. The total open interest for calls and puts on F for all listed maturities is currently around $6.4bn (see grey lines in Figure 3).

Given Ford’s slightly larger market capitalization ($63bn compared to GM’s $55bn market cap) and potentially higher volatility (given Ford’s higher debt leverage compared to GM’s), the Ford option volumes may remain slightly higher than GM’s option volumes. However, both stocks already have satisfactory options liquidity and therefore investors may find options a convenient way to express a particular view on these stocks.

h/t 5U

 

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Mon, 01/03/2011 - 10:06 | 844061 docj
docj's picture

I'm guessing this is pretty much precisely how fascism is supposed to "work".

Mon, 01/03/2011 - 10:08 | 844064 Kaiser Sousa
Kaiser Sousa's picture

yeah, and their fucking with Silver again too...

so obvious....thanks Bart Chilton

Mon, 01/03/2011 - 10:22 | 844089 Azannoth
Azannoth's picture

If silver goes higher I am gonna take profits on my silver stocks, if silver goes lower I am gonna buy more physical, I win either way :)

Mon, 01/03/2011 - 10:08 | 844066 unwashedmass
unwashedmass's picture

 

this is a good one, but my favorite "herd the peasants into the corral for slaughter" call this morning is the reco on Priceline and Amazon. That one might have been from JPM as well.

Mon, 01/03/2011 - 10:08 | 844069 unununium
unununium's picture

JPM is probably sitting on a stack of March $17 F calls.

Customers of these firms will never learn.  An inside account of the systematic exploitation of clients has been available anywhere since Liar's Poker was released 20 years ago, and probably earlier.

Which reminds me, I need to add Michael Lewis to my list of anti-bank heroes.

 

Mon, 01/03/2011 - 10:19 | 844083 Jim B
Jim B's picture

Actually, GM sold off most (if not all) of it's defense related divisions a long time ago.  GM's auto Biz has been a money loser for a long time and GM has canalized itself to support a bloated infrastructure and over paid workforce.  They don't have much left and will have to actually make money selling cars.... LOL

Mon, 01/03/2011 - 10:10 | 844072 Oh regional Indian
Oh regional Indian's picture

Not surprising at all. 

GM supplies far more to the war machine than ford does.

For all the wrong reasons, indicative of this time, I think GS has a winner here.

"General" Motors. See?

ORI

http://aadivaahan.wordpress.com

Mon, 01/03/2011 - 10:12 | 844074 metastar
metastar's picture

Good luck GM. I decided the day you took the bailout that I would never buy one of your cars again, just as I will not bank at the TBTFs.

Mon, 01/03/2011 - 10:53 | 844141 No Mas
No Mas's picture

Well, well.  YOU aren't going to buy another GM car; that should put a huge dent in their sales.  And YOU'RE not banking at the TBTFs??  Look out below, their deposits are really going to take a hit!!!!!

My god the hubris of the ZH sheeple.  I'm sure the herd will moo their appreciation, but outside your backyard bunker the real world is laughing their asses off at the clowns you guys have become.

 

Mon, 01/03/2011 - 11:36 | 844228 VisualCSharp
VisualCSharp's picture

WTF is your problem? I applaud metastar for his decisions. They are the right ones to make. He is an individual, as we all are, and can only do the right thing for himself. And if the "herd" is mooing their appreciation that indicates metastar isn't alone.

What "right thing" have you done recently?

Mon, 01/03/2011 - 14:10 | 844603 Problem Is
Problem Is's picture

Agreed
Voting with you dollars is the best weapon of the masses...

Mon, 01/03/2011 - 13:43 | 844524 cranky-old-geezer
cranky-old-geezer's picture

Sounds like the hubris is all yours.

Mon, 01/03/2011 - 14:50 | 844694 GreenSideUp
GreenSideUp's picture

Moo.

Plus, I personally know a bunch of "sheep" who aren't buying GM any more, nor are they banking at the TBTF banks.  Most of them don't understand it all that well but they hate the TARPs and bailouts and they hate fascism.  At any rate, they're not laughing at those who are willing to do something, anything, no matter how small.  

 

Mon, 01/03/2011 - 10:13 | 844077 Cdad
Cdad's picture

Don't you just love it when the criminal syndicate known as Wall Street brings up a loogie...and I mean from deep down...and hacks it into your face?

Anyone recommending GM over Ford is in need of morality retraining.  I say this after a lifetime of enjoying Chevy cars and trucks...a man who will never buy another.

That said, shorting Ford probably makes sense....just without the GM part of the syndicate's trade.  GM can kiss my rear end...the fascist pricks!  H. Patel's name should be remembered, and all future recommendations from this guy disregarded, as he is clearly allowing himself to be a tool of the syndicate known as Wall Street.

Mon, 01/03/2011 - 10:16 | 844080 ak_khanna
ak_khanna's picture

The banks and financial institutions have emerged to be more powerful than earlier anticipated and exert greater influence on the political class and central bankers who are responsible to curb their activities. Not a single top shot banker has been charged with bringing the world financial system on the brink of collapse in 2009. They continue to enjoy record bonuses while the unemployment continues to increase and families loose their homes to foreclosure. They have successfully stalled all efforts to curb their speculative activities are now in total control of the movements in all the stock, commodities, bonds and currency markets thanks to the unlimited funds provided to them by the central bankers.

http://www.marketoracle.co.uk/Article24581.html

Nothing is going to be solved till The Glass Stegall Act is reinstated.

Mon, 01/03/2011 - 10:19 | 844082 knukles
knukles's picture

"We believe that this trade may be particularly attractive for those investors who anticipate outperformance of GM relative to Ford."

LOL

Ranks right up there with; "A fresh corpse might be particularly attractive if you're a necrophiliac."

Mon, 01/03/2011 - 10:21 | 844085 Jake3463
Jake3463's picture

I believe the effects of Moral Hazard now have officially gone full retard.

Mon, 01/03/2011 - 10:26 | 844096 spongeBOB
spongeBOB's picture

 Douche bank upgrading GM and AA this morning. This is the same bullshit as last year when every analyst and his brother coming out and upgrading stocks on the first day of the year, after the market had rallied 70%.

Mon, 01/03/2011 - 10:54 | 844142 ZeroPower
ZeroPower's picture

Well, to be fair, the market DID end up last year..

Mon, 01/03/2011 - 11:00 | 844150 spongeBOB
spongeBOB's picture

I don't FAIR andf US equity markets should be used in the same sentence :)

Mon, 01/03/2011 - 10:32 | 844116 Vergeltung
Vergeltung's picture

this is a real shame, as IIRC, Ford took no bailout money and are actually succeeding in the marketplace with sound business strats.

Mon, 01/03/2011 - 11:17 | 844197 ExpendableOne
ExpendableOne's picture

Ford took tarp money / loans on the quiet side.  They didn't play it up, but they took the money.

Mon, 01/03/2011 - 11:55 | 844278 JohnG
JohnG's picture

Source?  Can't see that in any financials for F.

Disclosure: Long F.

Mon, 01/03/2011 - 12:30 | 844353 karzai_luver
karzai_luver's picture

I am not going to bother to look it up, it doesn't matter as Ford in public hearings supported GovvyMotoers getting the bailout.

 

Further more Ford was said to have "bet the company" to fund via debt their turnaround. Who thinks they would NOT have been bailed out if that failed?

I suspect the fix was in no matter.

 

Shamefull.

 

 

and then to see Ford hoisted onto some moral mountaintop.

 

The sheep are well and truely a bunch of blind bumpkins.

 

Mon, 01/03/2011 - 13:25 | 844491 Vergeltung
Vergeltung's picture

yeah, whatever you say moron.

Mon, 01/03/2011 - 12:57 | 844413 ExpendableOne
ExpendableOne's picture

Sorry, not TARP exactly, but still Fed Reserve support.  This guy can sum it up better than I can.

 

http://www.sodahead.com/united-states/is-ford-motors-really-taxpayer-independent/question-1403859/

Mon, 01/03/2011 - 16:05 | 844888 Freddie
Freddie's picture

I think all the car companies that had their own financing arms took support when the commercial paper market froze.  BMW and Mercedes too.  I am not sure about Honda and Toyo.   Also that Ob*ma whore General Electric had all their worthless debt backstopped.

Mon, 01/03/2011 - 22:47 | 845663 JohnG
JohnG's picture

Agreed, though CPFF only bought 3 month paper through 1 Feb 2010.

The debt is detailed in Note 10 of the latest 10Q.

Mon, 01/03/2011 - 10:36 | 844118 LoneStarHog
LoneStarHog's picture

\Sarcasm On ... I am confident that Mr. Kirk Kerkorian will be buying most of those Calls... \Sarcasm Off

Mon, 01/03/2011 - 10:39 | 844121 Dan The Man
Dan The Man's picture

 

makes them an easier target

Mon, 01/03/2011 - 10:42 | 844125 JawsMusic
JawsMusic's picture

I buy a new vehicle every two years or so, this year it was a Ford.

It will never again be a GM or Chrysler product. Its imoral to reward theft.

 

Mon, 01/03/2011 - 11:25 | 844215 NumberNone
NumberNone's picture

Not jumping on the government bandwagon is what is hurting Ford in the short run.  Government, banks, and GM in one big giant circle-jerk to keep the illusion that the flood of government money is creating utopia. 

Average person will never hear of the JPM recommendation all they will see is GM going up (government good) and Ford going down. 

Mon, 01/03/2011 - 11:59 | 844290 JawsMusic
JawsMusic's picture

I do think that personal purchasing decisions are a valid discussion point for GM.

What percentage of GM's US customers purchased GM becasue of a desire to buy american?

Now what percentage of thoose people are mad about the direct Government intervention in the GM bankrupcy, they are now left with one choice Ford.

Short Ford and Long GM, I can't see anyway that makes sense.

 

 

 

 

 

 

 

 

 

 

Mon, 01/03/2011 - 12:29 | 844350 Silverhog
Silverhog's picture

Anything is OK, as long as keeps the beast alive. The plan is to eventually destroy private business.  Government owned businesses will get all the skittles they wants.

Mon, 01/03/2011 - 12:43 | 844381 carbonmutant
carbonmutant's picture

If GM and Ford were the only two players in the EV game this report might have a point.

Mon, 01/03/2011 - 12:46 | 844387 knukles
knukles's picture

I made a decision some 20 years ago or so to never buy another GM product after the bag-o'-shite it was they'd called a Chevette.

Tue, 01/04/2011 - 09:15 | 846183 Papasmurf
Papasmurf's picture

Brilliant move.  Since most options expire worthless, they'll profit on both ends of this trade.  One would think this scheme would come from the squid, not from JPM.

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