Back on February 27th there was a massive long dated bullish print in GE options. We highlighted the trade and offered an alternative bullish options trade for those whose trading is inspired by unusual options activity. Here was the trade and the rationale:
The largest trade on the day across single stock, etf and index options was a long dated bullish trade in GE. When the stock was $25.93 a trader paid .52 for 125,000 of the Jan2017 30 /35 call spread to open, spending $6.5 million in premium for long exposure in between $30.52 and $35 on Jan 2017 expiration with a break-even up 18%, and a max gain of $4.48 (17.5% of the underlying stock price) or about $56 million if the stock is $35 or higher, up 35%.
Hypothetical Trade: GE ($26.05) Buy to open May 26 calls for .80
Break-Even on May expiration:
Profits: above 26.80
Losses: up to 80 cents between 26 and 26.80 with max loss of 80 cents below 26, risking about 3% of the underlying stock price.
The stock is cheap, trading at only 15x expected 2015 earnings growth of 5%. It pays a dividend that yields 3.5% and actively buys back their shares. With 55% of their sales coming from overseas the company is obviously struggling with the effects of a strong dollar, and their exposure to emerging markets has kept investor sentiment at bay.
And short dated options are cheap, with 3 month at the money calls trading at 15 vol
Who knows if this was what that call spread buyer was playing for but GE is up 8% today on the announcement of a massive buyback and a spin-off of GE Capital.
General Electric plans to sell off most of its finance arm over the next two years, redefining the multinational conglomerate as it seeks to complete a transformation begun amid the tumult of the financial crisis.
In addition to huge planned sales of assets outlined by the company on Friday, G.E. will take other significant steps, including bringing back about $36 billion in cash that now resides overseas.
It will also buy back up to $50 billion of its own shares, a bold move to further rejuvenate what has been a largely stagnant stock price.
With the stock up 8% that massive call spread is almost a double for the buyer. That’s pretty good but not as good as the May 26 calls that are now about 1.85. This was what we said about doing something a little more near term in the original post:
So for those who think the stock is poised to make a run to multi-year highs I would suggest that it may be a better play to look to shorter dated options that capture some potential near term catalysts. The company will be speaking at two brokerage conferences in March, hosting a Technology Investor meeting on March 11, reporting Q1 earnings on April 17th and holding their annual shareholder meeting on April 22nd (via IR site here).
Sometimes it’s better being lucky than good. So if you had this trade on, what do you do now? You could just simply sell on the news and pocket over a dollar in profits. Or you could sell half and let the other half ride into earnings. Or option three is to spread those by selling the May 29s at .20. Vol is up on the day but everything is still dollar cheap so I don’t like the spreading option.
The stock is now butting up against resistance at $28 highs made in late 2013. It could break out so if you wanted to stay in the game for that breakout I would suggest either selling half of the trade, or better yet, rolling the strike up by selling the May 26’s and buying the May 28’s for .54.
The roll pockets some profits and keeps you in the game for a possible earnings breakout. Those could even be spread into a call spread if the stock works its way back up to 28 in the next few days.
So bottom line, if you’re happy with the move on the news take the money and run! If you want to stay in, I think selling half or rolling to a higher strike makes sense here.