General Electric Company (NYSE:GE) is a Wall Street staple that is as old as dirt. But it has solid fundamentals — which it just reiterated in its fiscal Q2 earnings report — and that’s enough to let me create opportunities.
So when I tell you today that I want to short GE stock, it’s with no disrespect to the company. I just see an opportunity to trade General Electric, and get paid to do so.
The metrics on General Electric stock are solid, but a trailing price-to-earnings ratio of 30 doesn’t strike me as cheap. For something as boring as this, I expect a lower P/E.
But perception isn’t everything.
Technically speaking, GE’s 12-month range is too volatile. I would expect 14% moves three times over from momentum stocks, but not from GE stock. I can identify consolidation zones to help me set my risk. From the weekly chart, it’s clear that $28 per share area is a long-term pivot. It had served as resistance through October 2015, and since then has been reliable support.
It will take a lot of bad news to have General Electric convincingly lose the $28 area.
Looking at open interest, the short-term downside scenario is easier than that of a rally. So I want to bet on a small dip. It’s nothing more than a bet on GE’s short-term price action.
How to Trade GE Stock
The short-term bearish bet: Buy the 28 April $30 puts for 20 cents per contract. This leg is within striking range of the expected move based on the April options pricing.
Given my aforementioned arguments for General Electric’s support zones, I will leverage the value area to make this trade pay me even if I incorrectly guess the earnings direction.
The long-term trade: Sell the Dec $23 put and collect 25 cents per contract. This trade has a 90% theoretical chance of yielding maximum profit. I will sell two contracts of these for every one of the bearish bet. If GE stock falls below my strike, I am willing and able to own it at $23 per share.
The net effect of both trades is a healthy credit, so in essence I am being paid to short the earnings report. As long as GE doesn’t fall through $23, any premium I recapture from selling the April 28 put position would be incremental profits.
This trade is ultimately designed to be a boring one after this earnings release. The goal is to create income out of thin air with a 20% margin for error.
Learn options as easy as 1-2-3 in a personal 1on1 webinar here. 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.
