Chrysler Bankruptcy Drives GM, Ford Interest
Options Plays by Better Trades
April 30, 2009 -
Wall Street shrugged off news of Chrysler's official Chapter 11 bankruptcy
filing for the most part on April 30th, and options players followed through
by wading into contracts on automotive stocks.
Details of Chrysler's drive towards bankruptcy were released this morning,
leading up to a news conference at the White House held by President Obama.
Italian automaker Fiat will assume a 20% initial stake in Chrysler (rising to
35% as benchmarks are met), and GMAC will take over the automaker's loan
portfolio. Government officials will expedite the bankruptcy process, saying
it should run 30 to 60 days. But some experts believe the process will be
slowed considerably by debt holders who are set to oppose the government's
plan.
Call option activity perked up among General Motors (GM) and Ford (F) in the
wake of the Chrysler news as bullish sentiment rose on prospects that the two
largest U.S.-owned automakers will gain market share. That is, if GM manages
to stave off bankruptcy of its own. Shares of GM jumped 6% to close at $1.92
and Ford rallied 9.7% to $5.98.
With Chrysler officially falling into the realm of bankruptcy, the auto
industry's eyes are now fixed on Detroit-based General Motors. On Thursday,
GM announced plans to furlough workers in a move to cut costs, forcing
salaried employees to accept partial pay while taking up to three months off
each year. Despite aggressive cost control measures implemented by GM, most
analysts believe it will be difficult for the ailing auto giant to avoid
bankruptcy, given the current environment.
Meanwhile, Wall Street is optimistic about Ford's future. Recently, Goldman
Sachs added Ford to its prominent Conviction Buy List and Soleil Securities
held the automaker at a "buy" rating as of April's close.
The dichotomy of business outlooks for the two U.S. auto producers details a
somewhat perplexing explanation for Thursday's options activity. With
Chrysler officially declaring bankruptcy and General Motors churning through
federal loans at a ravenous pace, GM's call option activity looks like a Hail
Mary desperation play.
It's clear that Washington will not let the automotive industry die, but
President Obama has had no qualms about wiping out shareholders and debt
holders through a restructuring process, evidenced by the Chrysler move. The
endgame for General Motors in all likelihood appears to be bankruptcy, a move
that would appear to benefit put buyers more than call buyers.
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