Buy GM Put Spreads, Don't Short Stock, Lehman Strategists Say

By Jeff Kearns

Aug. 5 (Bloomberg) -- Investors should use options instead of short selling the stock to bet General Motors Corp., the automaker that reported a $15.5 billion loss last week, will keep falling, according to Lehman Brothers Holdings Inc.

Maneesh Deshpande and Devapriya Mallick, the top-ranked derivatives strategists in Institutional Investor magazine's 2007 survey, advised buying put spreads, purchasing one GM January $10 put and simultaneously selling two January $5 puts. They said investors should also acquire shares of Ford Motor Co., the second-largest U.S. automaker, because it will probably outperform GM, which closed at a five-decade low of $9.38 in New York Stock Exchange composite trading on July 14.

``The large short interest in the GM stock makes it vulnerable to a short squeeze, making a straight short position quite risky,'' the two strategists wrote in a report yesterday. Put spreads have a ``much better risk-reward profile.''

Almost 29 percent of Detroit-based GM's stock available for trading has been sold short, compared with 15 percent for Ford, based in Dearborn, Michigan, according to Bloomberg data. In a short sale, investors sell borrowed stock in the hopes of profiting by buying them back later at a lower price. When short sellers perform the latter step, they tend to push the shares higher.

GM reported the third-biggest loss in its 100-year history Aug. 1 on plunging U.S. sales and the declining value of truck leases. Lehman stock analyst Brian Johnson cut his share-price forecast for GM yesterday by 44 percent to $11 and more than doubled his 2008 loss estimate to $14.51 a share.

GM retreated 1.3 percent to $10.10 yesterday, extending its 2008 slump to 59 percent. Ford rose 3.4 percent to $4.81, paring its loss this year to 29 percent.

Selling options when using a put-spread strategy helps finance the transaction because the seller collects the premium paid by the buyer. Spreads also cap profit if the stock falls below the lower strike price. Puts give the right to sell a security for a certain amount, the strike, by a given date.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.