Trade Update $GE: Closing April Calls

by Dan March 26, 2014 10:56 am • Commentary

Back on February 27th I wanted to take a bullish view on GE with the idea that the stock’s underperformance since reporting their Q4 would abate and the stock would play catch up with the broad market.  Since then the stock is up less than 1%, basically in line with the SPX.  But here is the thing, the SPX is within spitting distance of a new all time high, looking poised to breakout, while GE is till 8% or so from its previous 52 week high made in January.  To be clear, while I think there is a decent shot the SPX breaks out to new highs, GE’s poor relative performance does not suggest that the stock will give me the bang for my buck that I would be looking for in such a situation.  At this point I am going to close the position for a little more than what I paid and look for a different set up in the stock as I do like the potential for a re-test of $28 at some point in the coming months, just not with the structure that I have on now as it’s basically a binary earnings report structure at this point. I do not consider this a win as it tied up capital for a month, but prefer this to a sharp stick in eye.

ACTION:  Sell to Close GE ($25.76) Apr 25 calls at 1.00 for a .05 gain



Original Post Feb 27th, 2014:  New Trade $GE: Generally Un-Exciting

After closing at the dead highs for 2013, also a 5 year high, GE has been a fairly dramatic under-performer in 2014, still down about 9% despite the S&P 500 back in the green and hovering just below all time highs.

From purely a technical level, and despite the poor relative performance GE looks fairly attractive.  On a 1 year basis, the stock has consolidated just above the Oct Breakout of $25, and now sits above the all important 200 day moving average:

GE 1yr chart from Bloomberg
GE 1yr chart from Bloomberg

From a vol standpoint, options are cheap trading just above 3 year lows:

GE 30 day at the money IV over last 3 years from Bloomberg
GE 30 day at the money IV over last 3 years from Bloomberg

One of the issues for GE could be valuation, despite earnings and sales only expected to grow about 3%, the stock has a PE of about 15x.  The dividend yield of about 3.5% and the multi-billion share repurchase should help buoy the shares as the company continues on cost cutting / restructuring measures that include selling non-essential businesses.

If the stock market is back in 2013 mode (buy every dip and rising tides lifts all boats) then GE’s under-performance should prob be bought with defined risk.  With sentiment poor, options prices cheap and the technical set up attractive I am merely going to buy a call in April that will catch the next identifiable catalyst, Q1 earnings on April 17th.  I would look to spread these calls on a rally towards 27.  I am not in a huge rush as I don’t see the stock getting away from here, so I am going to start small and pick at them over the next few trading days.

TRADE: GE ($25.48) Bought April 25 Call for .95

Break-Even on April Expiration:

Profits:  Above 25.95, up less than 2% have unlimited gains.

Losses: Between 25 and 25.95 lose up to .95, below 25 lose full .95 or about 3.7% of the underlying stock price.

Rationale:  If I were long GE I would be using $25 as a stop on the downside, the in the money call helps achieve this goal, I am stopped at $25.