Blue-chip heavyweight General Electric Company (GE) joins the growing list of corporate earnings reports coming this Friday. While GE stock isn’t known for making the kinds of sharp moves that short-term options traders look for in an event-driven trade, the recent market selloff may have provided an opportunity on that front.
Diving into the numbers, Wall Street will be looking for fourth-quarter earnings of 50 cents per share from General Electric — down 12% from the same quarter last year. Revenue, meanwhile, is expected to drop 14% to roughly $36 billion.
Expectations may be set a bit higher, however, among some in the brokerage community — General Electric’s whisper number comes in a penny better than the Street at 51 cents per share.
Judging from GE’s recent performance in the earnings confessional — beating in three of the past four quarters and matching in another — the company should have no trouble hitting these higher expectations.
Additionally, analysts are quite bullish on GE’s longer-term prospects. For instance, Thomson First Call data reveals that 10 of the 17 analysts following the shares rate them a buy or better, with seven holds an no sell ratings. The 12-month price target of $32.50 has some room for improvement, however, representing a modest premium of about 16% to GE’s current perch.
Options activity isn’t quite as bullish, however. The January/February put-call open interest ratio for GE stock currently rests at 0.89, with puts and calls nearing parity. This ratio rises to 0.99 for the weekly Jan. 22 series, as GE stock holders look to protect their positions against the recent rash of market selling pressure.
Click to Enlarge Overall, Jan. 22 series implieds are pricing in a potential post earnings move of about 3.6%. This places the upper bound at $29 and the lower bound at $27.
GE fought a two-month battle with $30 at the end of 2015, so a breakout above $29 shouldn’t surprise many. A breach of support at $28, though, could spook a few technical traders.
2 Trades for GE Stock
Call Spread: While trading calls in the midst of the current market environment is a bit risky, I believe that GE’s quarterly report will follow instep with its recent quarterly performance, thus reassuring investors and bolstering the stock. Those traders looking to bet on a post-earnings rebound for GE might want to consider a Feb $29/$30 bull call spread. At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $29.36, while a maximum profit of $64 is possible if GE stock closes at or above $30 when February options expire.
Put Sell: Since GE isn’t known for making large short-term moves, more risk-averse traders might want to consider a Jan. 22 series $27 put sell position instead. At last check, the $27 put was bid at 19 cents, or $19 per contract. On the upside, traders will keep the initial premium received as long as GE stock closes above $27 when January options expire at the end of this week. The downside is that should GE trade below $27 ahead of expiration, traders could be assigned 100 shares for each sold put at a cost of $27 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
