This is a very simple idea. I am proposing that you sell the Jan-2011 $2.50 calls for $0.55. As I see it, GM common equity will be worth something between $0 and $0.25 depending on the outcome of the debt for equity swap that was announced today. My base case is that the company is able to complete the swap and the current shareholders receive 1% of the new company. At the current $2.04 per share price, the pro forma market cap is about $125-billion. The company is still losing money and market share and has a very difficult road ahead of it. At $2.50 - your call strike price - GM would be worth more than Chevron or Berkshire or JP Morgan and would be around the 7th most valuable company in the country. At my $0.25 target price, the company would have a market cap of over $15-billion and would be at about 3x 2007 EBITDA excluding the pension liability. This is right around where many of the OEMs are trading once you exclude their finance subs at 80% of book value, yet GM looks far more challenged than its competitors. Post conversion, the company will do a 1 for 100 reverse split, so your short options will now have a $250 strike price and I think the implied volatility in the option will decline substantially. The value of the calls might decline to under $1 (or $0.01 based on the original sale price), so you will do quite well here.
The second possible outcome here is bankruptcy. Several news stories out today suggest that this is the more likely scenario. In this case, the calls should become worthless almost overnight.