Sometimes, you just get lucky. If General Electric Company (NYSE:GE) hadn’t announced that it was tapping John Flannery for the CEO position when it did, I and anyone following my recommendations could have lost on both GE trades last month.
General Electric shares have been locked in a near death spiral since the start of 2017. The vaunted Donald Trump-bump gone, GE stock plummeted more than 13% between January and mid-May. Struggling to find any reason to stay afloat, GE bounced twice off technical support at $27 throughout May, but found little in the way of positive price action.
Both the June $27 put sell and the June $28.50/$29 bull call spread I recommended on May 24 were going nowhere and headed toward total losses.
Click to Enlarge Then, on July 13, GE stock soared on news that the ailing company was going to have new leadership. That 3.6% bump was all that was needed to keep the June $27 put sell out of the money.
What’s more, it also helped propel GE stock to finish at $29 exactly on June 16 expiration, allowing the riskier June bull call spread to finish right at its maximum return of about 180%. Thank you General Electric.
It had been my hope that the company’s narrowed focus combined with the overblown fears of a dividend cut would boost the shares out of their 2017 nosedive. Such was not the case. Instead, my bullish picks were saved by the timely appointment of a new CEO. It’s a cautionary tale — albeit one with a happy ending — that trades don’t always go like you want them too.
The thing is, I want to be bullish on GE stock. I believe the company is moving in the right direction with technology, especially when it comes to the Internet of Things. It is also divesting units — like its historic lighting business — and slimming down to its more profitable units. But, as the appointment of Flannery to CEO indicates, General Electric is in restructuring mode, and that means things could get worse for the company’s bottom line before they get better.
Looking ahead to July, it’s time to let go of the bullish GE stock outlook for the time being. Now that the newness of the Flannery appointment has worn off, GE stock has resumed its former downtrend, and support at $27 may not stop the shares this time around. With GE now facing a $31 billion shortfall in its pension plan, changes now have to come sooner rather than later … and they may be painful for GE stockholders.
What’s more, sentiment is deteriorating quickly. According to Thomson/First Call, reports, only nine of the 16 analysts following GE stock rate the shares a “buy” or better, down a notch from 10 back in late May. Should more analysts jump on the bearish bandwagon, it could add selling pressure for General Electric.
Turning to the options pits, sentiment is largely non-committal from GE options traders. The July put/call open interest ratio rests at 0.81, practically where it rested in late-May — and this with the brief bullish boost that followed Flannery’s appointment to CEO.
Overall, July implieds are pricing in a potential move of about 4.5% for GE stock, which is well ahead of historical volatility for the shares. We can attribute this to GE’s restructuring, as even options trader are now unsure what lies ahead in the short-term with Flannery at the helm. As for GE’s expected trading range, the upper bound at $28.73, with the lower bound coming in near $26.27.
2 Trades for GE Stock
Bear Put Spread: All that excitement surrounding the new CEO evaporated pretty quickly, and that has me worried. Targeting the lower end of GE stock’s expected move, a July $26.50/$27 bear put spread has some profit potential. At last check, this put spread was offered at 14 cents, or $14 per pair of contracts. Breakeven lies at $26.86, while a maximum profit of 36 cents per share, or $36 per pair of contracts, is possible if GE trades at or below $26.50 when July options expire.
Call Spread: Okay, so I’m not going to let go of my bullish stance completely. This trade stands in opposition to the bear put spread, and is a much riskier play given GE stock’s recent price action and sentiment direction — but the return is much higher should Flannery and the transition offer up positive news in the next couple of weeks.
Those with a higher risk tolerance wanting to make a bullish bet on GE might want to consider a July $29/$30 bull call spread. At last check, this spread was offered at 12 cents, or $12 per pair of contracts. Breakeven lies at $29.12, while a maximum profit of 88 cents, or $88 per pair of contracts, is possible if GE stock closes at or above $30 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
