A very well-received light bulb went off at General Electric Company (NYSE:GE) three weeks ago. Now with spotlight shining elsewhere and shares priced at an attractive-looking discount, it’s time intermediate-minded investors consider a bullish collar in shares of GE.
Three weeks ago, CEO Jeff Immelt delivered a very pleasant surprise to investors. The bright and well-received idea was to mostly rid General Electric of its finance arm, GE Capital, and focus on its core businesses.
The large asset sale will allow GE to grow its competitive advantages as a premier industrial and technology company, take better advantage of those market’s strong growth prospects and realize stronger overall margins to help with General Electric’s bottom-line.
By 2018, GE anticipates 90% or more of its earnings will be from its “high-return” industrial businesses and a lift in excess of 50% from 2014 levels.
In addition and as part of the restructuring, General Electric is adding shareholder value with an announced massive $50 billion buyback and a commitment to future dividend growth, which stands at an attractive 3.7% yield.
GE Daily Chart
Nearly three trading weeks have passed since GE shares rocketed higher by nearly 11% in one session and 14% over two days to levels last seen on the way down during 2008 in the midst of the financial crisis.
The term rocketed is relative, of course. But for an old-school blue chip of more than $270 billion in market cap and a household name decades before fellow Dow constituent and the world’s largest company, Apple Inc. (NASDAQ:AAPL) was even a dream, the price reaction in GE stock is loud and clear regarding its approval level with investors.
Now, as the drama of the 11% price spike and overbought conditions have been diffused by time and an orderly consolidation lower, GE is bringing good things to life to market technicians. Looking to the weekly chart supplied, shares of GE have tested two Fibonacci cycle supports of 38% and 50%, as well as finding support off its former down-channel line.
For intermediate-minded investors agreeable to what’s occurred at the company level and in GE stock as well, a collar options strategy can help bring additional piece of mind to life.
Hedging in GE With a Collar
The collar spread is an attractive hedged stock position that can be used by bullish investors in GE seeking additional protection beyond what a stop-loss is capable of ensuring. Against a long stock position, a collar is (typically) is long a below market put for protection, while simultaneously short a similarly out-of-the-money call to finance the insurance cost of the put.
At the end of the day, a collar in GE offers an attractive intermediate-term solution for investors wishing to own shares and quantify their risk to an absolute floor or dollar amount without needing to fear bearish gap risk. In fact, it can get even better for the collar trader.
With the put’s guaranteed insurance policy in place, in the event of a truly large and typically undesirable counter move in GE stock; the trader is protected. A much smaller loss or even a position gain due to prior adjustments is quite possible.
In turn, the allowance afforded by a collar in GE stock allows the trader to be in a much stronger position financially and mentally to accumulate on weakness with much less risk than otherwise. Instead of flaming situations where there’s blood on the streets, you’ll be able to act like fellow shareholder Warren Buffett and buy more effectively if a panic creates opportunity.
The very acceptable compromise with a collar is this type bullish trader will generally make less profits on the upside than an investor naked long GE stock. That’s because the long put and short call have a bearish delta and are structured to cap the profit potential, barring adjustments, in the same way a vertical spread does.
GE June (Gloom) Collars
One collar that’s interesting is the GE Jun $29 call/June$25 put for 2 cents, or nearly even money. The strike combination is slightly outside the one standard deviation band based on 16% implied volatility.
This combination means not having to make an adjustment too quickly while taking advantage of the recent chart action is long GE stock.
Additionally, the negligible 2 cents affords piece of mind if our masterful use of Fibonacci and trend lines are rendered useless in their bullish efficacies due to some gloomy June or maybe even “sell in may” calamity unforeseen at this moment.
Alternatively and for a similar very small debit a trader could tighten the collar to two points using the GE Jun $26 call/Jun $28 put. The tighter GE collar will afford more downside protection and put one in position to adjust sooner on any potential stock weakness.
Ironically, the downside to this particular collar is the upside in GE stock. If shares of GE rally, as we want them to ideally do; gains before adjusting are capped sooner and will typically result in slighter profits than the still unadjusted and wider collar.
As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
