Original $GE

by Dan January 8, 2016 2:47 pm • Commentary• Trade Ideas

Back in late November we took a look at the technical set up in General Electric (GE), as the stock approached multi-year highs around $30 (Trade Idea – $GE Whiz).  At the time we advocated call calendars for those looking for make a defined risk way to play for a breakout, despite options prices being fairly cheap on an outright basis.  From Nov 30th:

GE 20 year chart from Bloomberg

But we did warn that while the recent price action had been nothing short of impressive, the stock was sitting in a slightly precarious spot on a short term basis, from Nov 30th:

GE 1yr chart from Bloomberg

The stock failed to breakout into year end, and has since declined 7.5% in 2016.  With the $28 breakout level not far away, its important to note that the next big technical support comes into play at the gap level from October down at $26.

The next identifiable catalyst will be Q4 earnings that come on the morning of Friday January 22nd.  GE is generally not a huge mover on earnings with the 4 qtr average above 1.25%.

But given the current market environment, GE’s exposure to emerging markets, industrial customers, dollar strength, the stock’s year to date weakness, the stock looks poised to move one way or the other on earnings and should continue to move into them

We don’t detail these sorts of trades often, but a Jan 22nd weekly expiration weekly straddle could be an interesting way to play for movement in GE:

Trade Idea: GE ($28.80) Buy Jan 22nd weekly 28 / 29 Strangle for 80 cents

-Buy 1 Jan 22nd 29 call for 45 cents

-buy 1 Jan 22nd 28 put for 35 cents

Break-Even on Jan 22nd weekly expiration:

Profits: above 29.80, or below 27.20

Losses: up to .80 between 27.20 and 29.80 (basically a 5.5% range)

Rationale: obviously for those with a directional bias, given the environment, picking a direction makes more sense, but as always you need to get a lot of things right with long premium event trades.

Trade Management: This is the type of trade that needs to managed if GE moves in one direction or the other into the earnings. The way professional options traders would do it would be to buy stock as GE goes lower and sell stock as it goes higher on a delta neutral basis. This is called scalping and is tricky to know when to places those buy and sell orders. The longer you let the stock run before scalping the more money you’ve made from the directional deltas. But there’s another way to do it for those not sitting in front of screens all day. And that is that if there’s a move one way or the other before earnings you can spread the strangle. If the stock were to drop from here you can reduce premium risk by selling a lower strike put against the long 28 put. And when the stock goes higher you can do the same against the 29 call by selling a higher strike. This creates a condor and mimics scalping in the stock.

THIS IS NOT A TRADE WE ARE DOING, but merely wanted to highlight the trade structure, and a strategy similar to what traders who focus on trading volatility might employ around an event when they think it could be mispriced.