Trade Update – Taking A Loss in $GE Feb Calls

by CC December 18, 2014 9:39 am • Commentary

Two weeks ago we took long exposure in GE looking to play a Dow laggard into what we felt were two potential positive catalysts (analyst day this week and Q4 earnings in Feb).   We bought the (at the money at the time) 26 call in February with the thought that if the market closed near the highs of the year that GE could start to play some catch up. Since then the market has gotten hit and GE has along with it. Now that previously at the money call is an upside call with which we need a big rally from this point to have a chance to be profitable. We are not inclined to wait around for that. As with most long premium directional plays we usually look to stop our losses at 50% of the premium paid.  We are going to use the last two day’s bounce to do just that.

ACTION –  Sold to close the GE ($24.80) Feb 26 Call at .35 for a .30 loss



This morning in my Notable Options Activity post I highlighted some short dated put buying in the industrial etf XLI .  What I found interesting about XLI is that three of its five largest components (who make up 20% of the weight of the etf) are down on the year. GE (~7%), UTX (-2%) and BA (-3%).  General Electric (GE) in particular stands out to me as it is the third worst performing stock in the Dow Jones Industrial Average.  The stock could be a very nice “Dog of the Dow” candidate.

So what’s been holding GE back in the midst of a raging bull market? Lack of growth and sales have been declining for years since the financial crisis. And earnings growth has decelerated massively from double digits a couple years ago to only 2% this year.  But the company pays a dividend that yields 3.4%, has an existing share buyback program with more than $10 billion in the kitty, and trades below a market multiple at 14.5x expected 2015 earnings expected to grow 8%.

Near term there are a couple of catalysts. Their annual shareholder’s meeting is on December 14th, and then their Q4 earnings on Jan 23rd prior to the open.

So for those who believe in “Dogs of the Dow” strategies, whether it be highest dividend payer, or worst performance of the group, the potential for short term appreciation in the New Year might be attractive to bargain hunt.

From a technical perspective, GE is pretty much at the mid-point of a fairly tight range between $25 and $27, and resting right on its 200 day moving average (yellow line), while $25 (red) is near term support and $27 near term resistance (green):

GE 2yr chart from Bloomberg
GE 2yr chart from Bloomberg

As for options prices, they are not as cheap as one would expect given the low levels of movement in the broad market as a whole over the last month. With the VIX once again approaching the 52 week lows, 30 day at the money implied vol in GE has seen a little bump, rising from the recent 52 week lows just above 10% to about 15%:

GE 1yr chart of 30 day at the money IV from Bloomberg
GE 1yr chart of 30 day at the money IV from Bloomberg

But vol is still low historically and is dollar cheap.

The stock has performed poorly but if you are in the camp that this morning’s jobs data speaks to a quickly improving economy, then stocks like GE that have underperformed, but are also cyclical, could be in the sights of portfolio managers In the new year.

So despite the recent uptick in options prices, they remain dollar cheap. So here’s the trade:

TRADE: GE ($26.00) Bought Feb 26 Call for .65

Break-Even on Feb Expiration:

Profits: above 26.65, up about 2.5% over the next 2 months

Losses: between 26 and 26.65 lose up to .65, max loss of .65 below 26

Rationale:  Despite the expected decay over the holidays, at the money calls appear to be a better way to play for a contrarian bullish view in GE, as the risk to owning the call is above the $25 support level and it won’t take much on the upside before these are at parity. If the stock does catch a bid after New Year’s we’d look to spread.