On Monday I highlighted a bearish options trade in GE (here):
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.
Here was my commentary on the technical set up in GE and the options prices:
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:
GE 10 yr chart from Bloomberg
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):
GE 1yr chart of 30 day at the money implied vol vs realized vol from Bloomberg
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.
Given the way I feel about the global economy, U.S. multi-nationals exposed to emerging markets, Europe and feeling the adverse affects of dollar strength, GE is a great short candidate. Yeah the 3.2% dividend yield is fat, and given the recent sale and spin of financial assets, the company is much easier to value for investors, but the stock trades above a market multiple at 19x earnings expected to be 15% year over year, but that will be massively aided by the company’s massively increased buybacks.
The next identifiable catalyst will be Q1 earnings scheduled for April 22nd.
So what’s the trade??
I want to target that event to make a defined risk bearish bet. There are a couple ways to do this, either look to finance longer dated puts in the form of a put calendar. For instance with the stock at $28.60 you could buy the May 28 put for $1.25 and sell the Feb 12th weekly 28 put at 22 cents. If the stock is $28 or higher next Friday then the short put strike would expire worthless and you have reduced the cost of the may 28 put by 18%, at that point you could do another calendar or sell a lower strike put in May and create a vertical put spread.
But in a volatile market like the one we are in, I think it makes sense to buy the strike in the expiration you are targeting and look to spread after the stock moves in your desired direction:
*TRADE: GE ($28.61) Bought to open May 28 put for $1.25
Break-Even on May Expiration:
Profits: below $26.75
Losses: up to $1.25 between $26.75 and $28 with max loss of $1.25 above $28
Rationale: While 4.3% of the stock price seems kind of hefty for a near the money 3 month bearish bet, I will look to reduce the cost on move lower by selling a lower strike put.