General Electric – GE Whiz

by Dan April 20, 2017 1:57 pm • Trade Ideas

General Electric (GE) will report Q1 results tomorrow before the open. The options market is implying about a 2% one day move tomorrow, which is rich to the 4 qtr average one-day post earnings move of 1.25%, but below its 10-year one-day post earnings average move of 2.8%.

Back in early February, I took a look at the bull – bear case for shares of GE after their CEO sat down with CNBC’s Jim Cramer, watch here. Here is what I had to say at the time:

Cramer hit Immelt hard on the bear case for the stock, coupled with the stock’s poor year to date performance (down 6%), the massive underperformance of the stock relative to its peer group and the broad market since Immelt took over as CEO in 2001 (up 25% with dividend’s reinvested), group average (of 10 stocks) 440% and S&P 500 up 173%. His retort is that the company has been transformed during that time period, exited financial businesses and has actually outperformed the broad market over the last 5 years and the XLI over the last 2 years, and he seems fairly optimistic with stable energy markets the company should perform well in 2017, hitting double-digit eps guidance, while also returning $20 billion to shareholders in buybacks and dividends.

Despite Immelt’s optimism near term, investors obviously remain skeptical that the company’s 2% expected sales growth this year can translate into 10% eps growth. GE trades 18x that expected eps growth, about a market multiple which seems fair given their commitment to capital return, with a 3.25% annual dividend yield.

At the time we highlighted a long stock alternative targeting tomorrow’s earnings:

With the stock at $29.65, the April 30 calls are offered at 55 cents, or just less than 2% of the stock price, offering a break-even at $30.55, up just less than 3% from the current level. That’s a pretty cheap bet in itself with earnings that should keep vol bid and help offset decay. But we like offsetting the even more in case it goes sideways for a bit. Either way you do it, it’s still a pretty dollar cheap contrarian bet.

-Buy to open 1 April 30 call for 55 cents

-Sell to open 1 April 32 call at 10 cents

With a day to expiration and GE at $30.45, this trade is worth about 55 cents. If I were long this call spread and thought the results and guidance will send the stock higher and it may continue afterwards to new highs, I might consider rolling the spread out a little bit, rather than holding into what is now a binary bet with only a day til expiration. If the stock were to close tomorrow at $30 or below, then the original premium paid, plus whatever gains would be lost. A roll out to May or June would allow for some time for the stock to breathe a little following results.

To my eye, $32 still looks like a reasonable near-term upside target, while $29 should serve as decent near-term support:


For those looking to roll this bullish GE defined risk view out:

Sell to close the April 30/32 call spread at .55

Buy to open the June 30 call for 1.00

Breakeven on June expiration: 31.00

Profits: unlimited above $31

Losses: up to 1.00 below 31, no additional losses below 30.00

Rationale – If the stock goes higher following earnings the June 33 calls could be a good sale to take away some premium risk