Anatomy of a Trade – $GE Whiz With

At the end of November we detailed a trade idea in GE that looked to finance upside calls in February with the sale of Dec31st calls of the same strike. This is a strategy we really like into year end as both implied vol and actual vol in the market tends to collapse in the shortened holiday trading weeks (we adjusted a similar trade in QCOM yesterday). As the market has drifted higher over the past trading days that’s exactly what has happened and GE is near our chosen strike. To recap here was the original trade idea 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.

With the stock now just over a dollar higher since we detailed the trade it is now worth almost a double. With GE at 31.20 the trade is worth .63 mark to market.

So What to Do Now?

Managing this trade idea depends on the goals. If this was simply a trade then it can be closed for a double and look for another opportunity (closing as close to 31 as possible in the next 2 days maximizes the profits, the higher or lower than 31 the worse the profit gets as the Dec31st calls will get marked intrinsically at the distance from 31 tomorrow while the Feb calls are close to 50 deltas).

If it is thought of as a long into the New Year then it’s become a nice stock alternative and similar to the QCOM yesterday it should be rolled. One nice trade would be to close the Dec31st calls and sell to open a higher strike in February. Selling the Feb 32 calls reduces the premium at risk to next to nothing and at a breakeven less than where the stock is currently trading. Closing the Dec 31st calls and selling the Feb 33 calls to open actually increases the premium at risk but leaves you with a lot more upside potential. Earnings are January 22nd and implied volatility should stay bid into the event, so it just becomes a matter of direction for those wanting to turn the calendar into a February vertical.