Fundamentally, General Electric Company (GE) has stood the test of time. Its management has had no major flubs, and GE stock has been relatively stable along with the global economy. This makes the disaster downside scenario is not likely without a severe general market correction. Meaning, if GE crashes, it won’t be because of GE-centric issues.
That said, this year has been difficult for GE stock, which is down 3% to the broader market’s 3% gain. But over the past year, GE is up 11%.
That’s an impressive achievement from a boring company like GE. Consider that the S&P 500 is only up 1.5% over this time, and a once untouchable Apple Inc. (AAPL) is off a whopping 21%.
Global growth over the next year will be challenging, but global central banks are in full easing mode. So there should be some upside pressure to meander higher.
So, I want to take a cautious long position in GE stock while generating income. For this, I can sell puts at levels I deem supportive. However, you should only sell puts if you’re able and willing to own the stock at the strike price.
The Trade: Sell GE Jan $26 puts. This is a bullish trade for which I collect 54 cents per contract. By doing this I commit to buying GE stock at $26 per share. This risk remains open through mid-January unless I buy back the put to close.
The Financial Risk: If the GE stock price falls below $26 per share, I may be assigned the stock at $26. So I would then be open to accruing losses for as long as GE is falling. My breakeven price is $25.46 per share.
Click to Enlarge The Technical Risk: From the chart, I can see a tightening price pattern. Higher lows and lower highs gathering energy. More often than not, this results in a sizable move. The direction of the move is unclear. While general markets are at all-time highs, one gets the impression that the downside resolution is more likely than the upside spike.
If GE loses the ascending support line, it would be vulnerable for a technical breakdown. The confirmation of the breakdown would invite technical sellers. That’s why I chose a level that has served as prior support. I see that for the past five years GE stock has consolidated well around $26 per share.
So given current variables, I would be comfortable buying GE stock at 14% discount from $30.30 per share. I consider this trade as being paid for the opportunity to own a good company at a steep discount.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
