On November 30th we ran through the bullish case for shares of General Electric (GE) into the new year and detailed an options trade to play for a long term breakout, and catch up trade to the broad market (read Trade Idea – GE Whiz).
Today GE is up 2.5%, outperforming the broad market massively, and making new 52 week and 7 year highs:
The stock’s out-performance today, prior to trading ex its 23 cent dividend tomorrow caught my eye, coupled with a very large overwrite in the stock that I thought was worth discussing.
When GE was $30.50 shortly before noon, an investor SOLD to OPEN 100,000 of the March 33 calls at 22 cents. This trade was very likely an overwrite of 10 million shares of stock. In this scenario, the investor is looking to add about the same amount of yield as the current quarterly dividend over the next three months. If the stock is below $33 then the investors would receive the 22 cents in premium, or $2.2 million, effectively doubling the quarterly yield, and if you annualized that return, it would be close to 3%, on top of the existing 3% dividend yield.
On the downside, the investor has a 22 cent buffer from the premium received. Above $33 on March expiration, the trader has the ability to buyback the short call, or have stocked called away at $33, effectively $33.22, up nearly 9% from the trading level.
Obviously this is a high class problem to have, but I suspect this is a long term holder, who is doing this on a portion of their holding. In a stock like GE that is in the midst of a massive restructuring, and recently committed to massive share-buybacks and has just broken above an epic downtrend, I’d be more inclined to look to overwrite shares once the stock breaks above the recent six week consolidation above $30: