Anatomy of a Trade – $GE: Managing a Profitable Call Calendar

by CC December 10, 2015 3:13 pm • Education

General Electric (GE) has been one of the best performing stocks in the Dow Jones Industrial Average in Q4, up nearly 24% since the end of September. In October the stock broke out to new 7 year highs, after spending the last two years in a fairly tight trading range between $24 and $28:

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

On November 30th, when GE was $30.05 we detailed a trade idea that positioned for a move back towards the highs at 31 by year end, and then a breakout afterwards. A call calendar. Here was that trade and rationale:

GE ($30.05) Buy the Dec 31st/ Feb $31 call calendar for 33 cents

Rationale – This trade does best with a consolidation or a slight creep up to $31 by year end. February options catch earnings so those should stay bid from a vol standpoint. If we get to year end with the stock here or slightly higher we’d look to roll up the short call or even just leave the February call as is as it’s becomes a very cheap way to own GE for a breakout in the New Year.

GE is approaching the 31 strike today so let’s look at how this trade idea stands and how best to manage. With the stock now 30.90 the Dec31st 31 calls are worth about .38 and the Feb 31 calls are worth about .85 so it’s a gainer mark to market at .47 vs the .33 original cost.  With the stock just below strike this position is long only 3 deltas so it’s essentially a neutral trade at this point. The longer the stock can hang out near this area the better. The current theta (money collected from the faster decay of the short Dec31st calls vs the decay of the long Feb calls) is about 1c a day.That will accelerate over the next few weeks, especially with what is typically low vol Holiday trading. But deltas start to become an issue if the stock breaks through the previous highs in the near term.

So from a management standpoint the stock is right you want it for a calendar, but success from here on out depends on if the stock stays in this range. A breakout above 31 and it becomes a short delta position, which was not the intention. So a mental stop just above 31 makes sense. And at that point a roll of the Dec31st 31 calls to the Feb 33 calls would make sense. That roll would create a very cheap vertical spread in February, but the roll is slightly better the closer we are to year end as the cost of closing the Dec31st calls gets better each day. So patience is in order here with a mental stop just above 31 if the stock does indeed breakout of this consolidation.