General Electric Company (NYSE:GE) is showing there’s more to life than collecting dividends following last week’s earnings report. But if you’re looking to capitalize on GE stock, traders may wish to sink their teeth into a bear put spread instead. Let me explain.
Fading the news is a strategy that can pay big dividends for investors. And in the case of Friday’s woeful earnings miss, General Electric stock has witnessed a ‘buy-the-news’ variation in all its glory.
For a few fast money operators, GE stock generated quick profits of nearly 8% on Friday and almost double the yearly payout income investors earn these days. This happened as the stock quickly reversed a fresh three-year low open of $22.10 and rocketed higher to finish up just more than 1% at $23.83.
General Electric stock’s bullish price action found investors looking past a massive profit miss of 41% on earnings of 29 cents versus Street views of 49 cents. The company suffered a larger-than-expected cut to its full-year profit forecast due to restructuring costs and drags within the company’s power and energy units.
Friday’s optimism also discounted news that its free cash flow will continue to weaken and the possibility that GE stock’s “sacred cow” dividend could be at risk. This is true as management was quick to stress that the payout is a “priority.”
And then came Monday.
General Electric stock caved back towards Friday’s low following a pair of downgrades from Morgan Stanley and UBS. The firms cited increased concerns its dividend will be trimmed at an analyst meeting on Nov. 13 and the higher probability of this cut isn’t priced into the GE stock price.
GE Stock Weekly Chart
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Looking forward and with the key 62% Fibonacci support convincingly broken, a minor 76% level failing, as well as weekly stochastics and Bollinger positioning reset and aligned for additional selling pressure, GE is still not ready to bring good things to life for bullish investors.
GE Stock Bear Put Spread
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Admittedly, there was no time for looking at the chart and deliberating what to do with those paper profits. Bottom-line, traders needed to be prepared ahead of time with an order to close the position at the open of trade, so that they could capture a gain resembling the max payout. Otherwise, they’d risk watching all that value go “poof!” by the close of trade.
As of Monday’s close, options premiums are trading for fair value relative to GE stock. However, pricing of GE’s calls and puts are far from cheap as implieds and underlying volatility are elevated at 12-month plus highs.
Given the risky options environment and our view that General Electric stock is headed lower, a bearish spread — once again — makes sense. This will reduce uncertainties associated with Greeks and absolute dollar exposure.
After reviewing GE’s options, one favored combination is the December $21 / $20 put vertical for 20 cents with a max payout of 80 cents or return of 400% below $20 in GE stock at expiration. In our view, if you’re going to buy anything on GE stock, this bear put spread is a strong contender.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 and StockTwits and feel free to click here to learn more about how to design better positions using options!
