The fact that GE stock endured a slew of negative headlines in 2017 actually serves as a benefit now. Last year’s dips in GE stock established a floor against which I can trade. Investors sell headlines, but with every bounce, the floor below gets stronger as long as we don’t open a new can of worms. In this case, investors have already had their tizzy over dividend-related fears, so this dip shall pass and I want to profit from it.
My thesis is that the selling will abate soon. So, I want to bet against it getting worse from here. I sell risk against proven support to generate income and let time do the work. Should price go against me, then I would temporarily own GE stock at a discount from here. I am confident that I could successfully manage that risk should the worst happen.
How to Trade GE Stock at These Levels
I do have to recognize that earnings are coming soon and the short-term reaction to those are always binary. We don’t know what the company will say nor how investors will react. But I do know that things in 2017 got pretty ugly and the stock held $17-per-share, so I’m willing to bet against that level today.
Fundamentally, General Electric stock is not cheap in absolute terms. At a 21 price-to-earnings ratio, it is more expensive than Apple Inc. (NASDAQ:AAPL). In spite of its woes, GE stock is even priced in line among its peers say like Honeywell International Inc. (NYSE:HON). The only saving grace is that GE’s price-to-book ratio is under 3 and only one third of that of HON.
Technically, GE stock is stuck in the mud. This dip foiled a potential technically breakout that could have launched it towards $20-per-share. Now we watch for a retest of support.
The bottom line is that in 2017, General Electric stock was a falling machete. But now that the shock factor is out, it’s a regular falling knife and I am willing to cautiously catch it.
The Bet: Sell the GE Feb 9 $17.50 naked put and collect 40 cents to open. There’s an 80% theoretical chance that I would retain maximum gains with this play. But if the price falls below my strike, then I accrue losses below $17.10.
Selling naked puts carries big risk, especially for a stock as frothy as GE stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the GE Feb 9 $17.50/$16.50 credit put spread, where my risk is limited. Yet if the spread wins, it would deliver 15% in yield.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
