General Electric Company (NYSE:GE) looks ready, both off and on the price chart, to bring good things to life for investors. But for those interested in getting long GE stock, a collar strategy offers a really great deal. Let me explain.
Much like the Commander in Chief, GE stock obviously has its doubters in the respect department. For shareholders of General Electric that has amounted to a fairly punitive gain of just 2.25% compared to the S&P 500’s 10% increase since Trump won the election back in November.
So what’s behind GE stock’s relative underperformance? It could be a couple of factors: Some recent cautious commentary at InvestorPlace cited a lack of an “oomph” factor, the company’s Baker Hughes acquisition as a non-starter and weak earnings power in the near term.
Still, General Electric is far from a disaster. There is the company’s steady and consistent dividend that pays investors an above-market 3.2%. Also, love him or hate him, the Trump’s energy agenda and infrastructure initiatives, coupled with firming global economic trend, should impact GE stock’s top and bottom lines in a positive manner. GE investors also have a nice starting spot to consider buying shares.
Off the chart, a reasonable, below-market forward multiple of 16 times earnings and shares priced at just over two times sales are factors to consider. And now, on the price chart, a Wall Street “punching bag” is looking friendlier to investors interested in buying GE stock at advantageous levels.
GE Stock Weekly Chart
Looking at the provided weekly chart of GE stock, over the past year and one-half and since staging a massive technical breakout, key support has held. That’s good news for bullish investors.
The initial testing of support in early 2016 could be best described as a sloppy hold, but don’t hold that against GE stock. A second and cleaner challenge in October of last year lends itself to the idea buyers are now more confident in purchasing GE. That’s also a positive development for owning General Electric shares.
More recent, GE stock has established a smaller double bottom that coincides with shares revisiting the pre-Trump election win levels. That’s also a solid benefit technically. Admittedly, investors do have to look past General Electric’s obvious relative weakness in appreciating the bottoming pattern.
Is it perfect? I think I’ve addressed the fact GE stock is not. Further, if I were to note a lower high in late 2016, that point is likely reinforced.
Bottom-line though, if you’re in agreement the pros outweigh the cons, a collar position can help guard against any real disasters from occurring with a long stock position in GE.
GE Stock Collar Strategy
Reviewing the GE stock options board, the Weeklys 12’ May $31.50 call/$29 put collar looks attractive as an alternative to a long stock position. With shares at $30.10 an investor can buy shares, sell the call and simultaneously purchase the put for a debit of $30.22.
For the extra 12 cents premium paid to own the collar versus a standalone GE stock position, downside risk is contained to 4%. Having that kind of insurance in place is always nice, but especially so when earnings, which are out later this month, are involved.
The real cost of the collar would be if shares of General Electric saw an abnormally large upside reaction following the earnings event. Profits are initially capped at just over 4% and essentially matching the downside risk.
The good news is the likelihood of GE moving aggressively by more than 4% to 5% in the immediate aftermath of earnings is historically small. If GE does manage to bring good things to life to investors, however, the better news is the collar can be adjusted, so that trading with the trend and additional profits are possible.
Investment accounts under Christopher Tyler’s management currently own hedged GE stock positions. 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.