If you subscribe to the “Dogs of the Dow” theory, then General Electric Company (NYSE:GE) should have you salivating heading into 2018. GE stock is down more than 40% since the start of 2017, closing yesterday at $17.43.
General Electric also pays out a quarterly dividend of 43-cents-per-share, resulting in a dividend yield of 2.75% — among the highest on the Dow Jones Industrial Average right now.
Aside from meeting all of the “Dogs of the Dow” requirements, there’s little else to cheer about when it comes to General Electric. GE news has been far from inspiring in the past year. The company is going through heavy restructuring, with new CEO John Flannery doing everything in his power to slash costs, layoff workers and sell underperforming divisions.On the plus side for GE stock, 2018 holds considerable promise if the company can finally find its feet. The new tax plan holds considerable advantages for GE, and there is already a boom in the global industrials sector that the company could finally join in on — just look at how well Caterpillar Inc. (NYSE:CAT) has done so far.
The problem for GE stock bulls is that they could be waiting a while for the shares to finally move higher. Fortunately, investor sentiment on General Electric is so abysmal that it could take only a minor positive bit of news to bring buyers back to the table.
That bit of positive news could arrive as soon as Jan. 19, when General Electric reports fiscal fourth-quarter earnings. Wall Street is currently expecting a profit of 30-cents-per-share on revenue of $33.09, with these targets falling steadily over the past couple of months.
I don’t expect GE stock to post blow-out quarterly results. In fact, the company will likely miss expectations. However, guidance will be the key.
Any positive tidbit in General Electric’s quarterly report could be seen as a driver for bargain hunters looking to snap up this blue-chip at rock bottom prices. Afterall, GE stock will head higher … it’s just a matter of when.
Turning to GE’s options backdrop, we find considerable optimism heading into January 2018 expiration, which just so happens to fall on Jan. 19, when GE will release its quarterly report. Currently, the January 2018 put/call open interest ratio rests at a bullish reading of 0.50, indicating that calls double puts among options most affected by General Electric’s next quarterly report.
Meanwhile, January 2018 implieds are pricing in a potential post-earnings move of about 4.4%. This places the upper bound at $18.25, with the lower bound coming in near $16.75.
Call Spread: Trading General Electric options right now is a risky proposition, so enter either of these trades only if you can stomach the potential losses. That said, GE stock is beaten down and sentiment is in the gutter. All it will take is one hint that the company is close to regaining its feet and GE stock should rise to the occasion. Earnings and the accompanying conference call could be that spark.
Traders looking to bet on a rebound for General Electric stock as a result might want to consider a Jan 2018 $18/$18.50 bull call spread.
At last check, this spread was offered at 10 cents, or $10-per-pair-of-contracts. Breakeven lies at $18.10, while a maximum profit of 40 cents, or $40-per-pair-of-contracts — a potential 300% return — is possible if GE stock closes at or above $18.50 when January 2018 options expire.
Call Sell: If you’re not willing to bet bullishly on GE stock just yet, or if you are holding General Electric and want to bank a bit of profit while you wait for the shares to rebound, then a Jan 2018 $20 call sell position could accomplish just that.
At last check, this option was bid at 8 cents, or $8-per-contract. A sold call allows you keep the premium as long as General Electric closes below $20 at expiration. If GE stock rallies above $20 prior to expiration, you could be forced to provide 100 shares at current market value for each call sold, which could be quite costly if you do not have enough stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.