General Electric Company: The Options Pit Is Circling GE Earnings

Dow Jones Industrial Average and industrials giant General Electric Company (NYSE:GE) reports earnings Friday morning. But do investors expect GE to bring something good to life or something less bullish?

General Electric Company: The Options Pit Is Circling GE Earnings

Let’s take a look at GE stock’s recent quarterly announcements, the GE stock price chart and what, if anything, the options market estimates in front of the earnings report.

GE Stock Earnings Picture

In front of General Electric’s Friday morning second-quarter earnings release, 20 analysts forecast profits of 46 cents per share. Views range from 45 cents to 47 cents.

The current consensus estimate compares to the year-ago Q2 result of 31 cents, representing an increase of 48%. Full-year profit views are for GE to earn $1.50 in 2016 and grow profits by 14.50%.

On the sales side, General Electric’s revenues are expected to rise to $31.76 billion versus 2015’s Q2 result of $29.32 billion. Sequentially, sales are forecast to increase 15% from Q1’s $27.6 billion.

Full-year sales estimates are pegged at $124.78 billion representing an increase of 6.6% over 2015’s $117.03 billion. Looking further out, General Electric is expected to see a marginal sales gain of less than 1% in 2017 to $125.6 billion.

General Electric’s Short-Term Trading Record

General Electric has established a mixed pattern of beating the Street’s profit views. Over the last couple years, GE has topped estimates 58% of the time on seven occasions, while matching forecasts 42% of the time. Investor reaction in GE stock has proven equally varied. Shares have notched three price gains and three declines in the report’s immediate aftermath.

Working backward, General Electric’s stock has moved -0.71%, -1.22%, 3.38%, 0.71%, -0.11% and 0.81% over the past several quarters. The overall investor reaction in GE stock has resulted in a modest average gain of 0.47% and variability of 1.63% based on a one standard deviation reading.

GE’s seven day stock performance has resulted in a similarly meek, but slightly negative -.23% price dip and one standard deviation of 2.96.

GE Stock Monthly Chart 

071816-ge-monthly-stock-chart
Click to Enlarge
Source: Charts by TradingView

There’s little evidence to suggest the modest-sloping and tight uptrend is in jeopardy — unless you see a bearish fifth Elliott Wave forming. This strategist anticipates profit-taking in GE over the short term.

A couple of Fibonacci retracement levels dating to key highs in 2000 and 2007, as well as overhead channel resistance coupled and a fairly aggressive rally on the daily chart, are likely incentives for profit-takers to step into GE temporarily without having to read too deeply into monthly wave counts and possible bearish implications.

Were a pullback to play out in the coming weeks, we’d look to a support area from $30 to $31 as offering a better opportunity for bullish traders to purchase GE stock.

GE Stock Options Pricing

In Monday’s session, the at-the-money GE August $33 put was the most heavily traded contract by a significant margin: volume of 10,600 compares to open interest of around 720 contracts. The GE put action points to investors either hedging long positions or anticipating a larger, bearish price move that runs counter to recent earnings reactions.

Traders initiating the volume may also have been selling the put as a way to collect premium within a bullish trend in GE. But with historically low premiums — and given the extreme rally of the past couple weeks — it’s our view this type bet wasn’t behind the activity.

At-the-money premiums in the weeklys July 22 call and put markets point to a 68% chance shares of General Electric remain within a range of $32.05 to $33.75 through Friday’s expiration.

The math behind the GE price range calculation is based on the straddle market and implied volatility of 25% with four trading sessions left. The weeklys contract is the purest play on the earnings event and tells us what traders collectively expect from GE in the immediate aftermath of its quarterly announcement.

The expected dollar move up or down works out to about 2.6% in GE by Friday’s close. Statistically, the pricing is on the edge of recent reactions in General Electric stock. But in the scheme of things, a larger move —  one we’d anticipate as taking the shape of profit-taking — seems quite reasonable.

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.

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