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General Motors (GM), Ford (F) going to $1

As GM goes, so goes the nation. It may seem like that is all too true right now, but it's not.

General Motors (NYSE: GM) has been a slow-motion train wreck for a generation.

Former CEO Roger Smith blew hundreds of billions in automation that forgot about workers and did not work. The company received import protection and a waiver of regulations from Uncle Sam to generate huge profits in SUVs, and it reinvested the money in excessive contractual obligations to already coddled workers currently earning in excess of $70 an hour.

And Ford (NYSE: F) and Chrysler were not too far behind.

Congress is now debating some form of bailout in addition to the $25 billion for re-tooling. The structure and future of this bailout is uncertain and, while I'm in the minority, I see nothing happening pre-Obama except a possible GM bankruptcy filing.

Many middle-of-the-road Americans, including many day-to-day Democrats and independents, want to see GM go through a prepackaged bankruptcy.

And why is that?

1. Cars that are out of sync with the marketplace.

2. A 25-year slide that management ignored or accelerated.

3. Grossly coddled workers who pay less for health care than congressional staffers and get more generous retirement benefits than veterans of Iraq and Afghanistan.

What are the odds of a bailout happening?

I'd say 100% post-Obama inauguration. But a post-Obama bailout is going to hit shareholders, and even workers, quite hard. If you listened to his interview on "60 Minutes," you know that Obama was very clear on the fact that everyone had to share the pain -- the shareholders, the debt holders, the workers and suppliers -- and there had to be a plan to make the companies viable.

He also said a prepackaged bankruptcy is a logical option in normal times, but the chaos in the credit markets may prevent this from happening, as credit might not be available. It also means that Uncle Sam could end up taking on the role of credit supplier in a prepackaged bankruptcy.

Where does that leave investors? I know many of you are tempted to trade the auto stocks based on the potential of one event -- the passing of a bailout package. The problem?

All put options are priced to a prepackaged bankruptcy or something close to that, regardless of their expiration date. The same is true for all auto parts suppliers that are a pure play on American car manufacturers.

Wait, you say, GM is trading around $3, and you could short it to bankruptcy. If GM gets a big bailout for some reason, and there is a short squeeze and someone calls their shares, you could be out double or triple your original investment. Not a good thing. Short these stocks at your own risk.

Wait, wait, you say, this is one of the larger binary events in recent history. Do I mean that you should sit it out? Not quite.

One of my rules is never short a stock -- buy put options instead.

My next rule is, do not buy a put unless there is a reasonable chance to get a double. This is not possible for GM or Ford right now, but I still think it could be a decent trade. Puts on both GM and Ford stock have premiums seeing the stocks going to a buck or worse -- and that is the play.

These are awful companies that are in the truest sense bankrupt, and they just keep burning cash they've piled up in the past. GM is going to go under in some form and will probably take Ford with it -- it's only a matter of when.

So, if you want to trade, stick to fundamentals and take the simple route: Look at puts on GM and Ford, and give yourself some time -- at least six months to expiration -- to ride out a surprise. You won't get a double, but you could do well.

But also be prepared to take a loss and move on, because you never know what could actually happen in Washington. The biggest risk is GM really does run out of cash and a hysterical Congress, trying to protect whatever is left of its legacy, signs a bill that truly is a bailout.

It's hard to see this happening given the stance of Senate Republicans -- who are returning to office in January (well, at least some of them) -- but it could. And then you would get seriously whacked.

There is another trade here. Trade in whatever you own and buy a GM or Ford SUV. They are at fire-sale prices. I just picked up a used Trailblazer with modest mileage and electronic everything for $11,000.

Now that's a great trade!

Michael Shulman is a contributor to OptionsZone.com.

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Last updated: November 25, 2009: 11:10 PM

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