Big Printin’ – $GE Whiz

by Dan February 1, 2016 2:52 pm • Commentary

Shortly after the open there was a bearish options trade in shares of General Electric (GE) that caught my eye, not specifically because of the premium outlay, but because of the commitment to purchasing puts in decent size (in contract terms) in two consecutive expirations of the same strike.  Options traders colloquially call this strategy a Put Stupid. On to the trade… 

When the stock was $28.86, a trader bought to open 30,000 of the March 26 puts for 28 cents to open ($840,000 in premium), and 20,000 of the April 26 puts for 41 cents to open ($820,000 in premium).

The March 26 puts break-even on March 18th at $25.72, down about 11% from trading levels.

The April 26 puts break-even on April 15th at $25.59, down about 11.5% from trading levels.

The choice of strikes, and the premium paid is kind of interesting, and I suspect that this is a shareholder looking for cheap protection.  The one year chart below shows that on two instances in the last year where the stock gapped up above $26, turning prior technical resistance into support:

[caption id="attachment_60879" align="aligncenter" width="600"]GE 1yr chart from Bloomberg GE 1yr chart from Bloomberg[/caption]

I would add that looking at the 10 year chart of GE, which shows the stock’s steady uptrend from its 2009 lows, that the only clear break came this past summer, but has now resumed above.  A break below the uptrend shows little support below $25 to the August 24th intra-day low of $20:

[caption id="attachment_60880" align="aligncenter" width="600"]GE 10 yr chart from Bloomberg GE 10 yr chart from Bloomberg[/caption]

Options prices in GE seem fair to possibly cheap, with 30 day at the money implied volatility just above 21% (blue line below), actually below its 30 day realized volatility (white line below – how much the stock is moving):

[caption id="attachment_60886" align="aligncenter" width="600"]GE 1yr chart of 30 day at the money implied vol vs realized vol from Blooomberg GE 1yr chart of 30 day at the money implied vol vs realized vol from Bloomberg[/caption]

Lastly, the choice of both the March and April strikes are also interesting because GE has already confirmed their Q1 earnings date, April 22nd, with neither expiration catching the event.