Support for General Electric Company (NYSE:GE) is showing cracks for value investors both off and on the price chart. But if you’re still looking to make the contrarian trade, a bull call spread rather than just buying GE stock could be a really great deal … or at least a reduced headache for investors. Let me explain.
Much like the Commander in Chief, GE stock continues to have its doubters. Similarly, the situation appears to be growing more serious by the day for General Electric’s value-seeking investors and what on the surface looks like one of the market’s stronger positioned Donald Trump stocks.
Whether or not the CIC gets taken down, GE stock is definitely under indictment already. Since last writing about General Electric in early April — much to our chagrin — shares are off by nearly 7%. The continued weakness has added salt to a wound of 11% in 2017, sans what some increasingly view as an at-risk dividend.
Most recently, several sessions back analysts at Deutsche Bank removed a “neutral” rating on GE stock and slapped shares with a fairly rare “sell” recommendation while lowering its price target to $24 from $28.
The firm anticipates General Electric will eventually require trimming its payout to shareholders, as well as reducing its earning guidance in the coming years. The firm cited deteriorating cash flow, ‘operating relatively close to the line,’ an underfunded $31 billion pension, questionable tax rate and prospective management reset.
Of course, bulls may contend the bearish call relies heavily on longer-term prognosticating, but currently trade cheaply relative to the market, as well as offer an attractive payout … beyond Deutsche’s warning. However, the weekly chart of GE stock is showing signs of wear and tear, which this strategist believes investors need to be respectful of.
GE Stock Weekly Chart
Back in April, I was optimistic GE stock could muster a period of relative strength and positive returns for investors following a smallish double bottom pattern which challenged the pre-Trump-election-win levels in General Electric shares. The forecast ultimately proved wrong.
Subsequent price action resulted in the breakdown of the pattern bottom. Now GE stock is testing a key lateral support line which dates back to late 2013, when a post-financial crisis high was established.
The current situation is tenuous, as this is a third test of support since early 2016. Also of concern, the price action of the past week resulted in a fairly definitive breach of support.
The one bit of good news for GE stock bulls is that a strong weekly close put together a bullish reversal candle, which finished on top of technical support. In conjunction with an oversold stochastics condition, if investors are interested in value hunting, a line in the sand drawn at last week’s low of $27.10 makes the case as a smart choice for minimizing risk.
GE Stock Bull Call Spread Strategy
Reviewing the GE stock options board, another way to minimize and set risk to a guaranteed amount is the July $29/$30 bull call spread with less than 1% of the equivalent risk of owning GE stock.
Priced for 22 cents with shares of General Electric at $28.05, this out-of-the-money vertical offers a return of 78 cents, or nearly 355%, if GE can rally 6.95% and above $30 over the next 60 days.
Technically speaking, the spread’s placement and timing requires that GE stock is bottoming.
Of course, if you’re thinking the type of rally in GE stock that’s needed for the spread to maximize profits sounds unlikely, you’re not alone. Optimistically, quite often that’s when these type situations do fulfill the promise. Personally though, I’d be on the lookout for reducing risk if during the vertical’s life, GE stock begins to show signs of bringing good things to life for investors.
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 Christopher Tyler’s 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.
