Off the chart, General Electric Company (NYSE:GE) still looks like a dog at risk of fleas. But as a contrarian investment using a modified options strategy, GE stock is ready to bring good things to life for bulls. Let me explain.
It has been a couple months since taking a look at GE stock as a contrarian-oriented investment. At the time, unsubstantiated rumors of interest from Warren Buffett’s Berkshire Hathaway allowed for a modest boost in share price for a very out-of-favor investment controlled by bears and disgusted bulls tossing in the towel. It turns out the hopeful bid was all for naught.
Another blow for investors came in late May as management warned it expects no profit growth from GE’s distressed power business. The surprise warning sent General Electric shares tumbling more than 7%.
And just when it seems like the worst is over for General Electric, on Monday JP Morgan stated it believes GE stock’s dividend needs to be cut again in order to pay off enough debt to match ratings agencies expectations. Throw in other unresolved threats like GE’s legal woes and the S&P 500’s largest pension shortfall — and it begs the question, can GE stock can ever bring good things to life for investors?
GE Stock Monthly Chart
The monthly chart of GE stock shows a name that’s been under siege since early 2017. During that time a steep bearish decline has taken shares in-between the 62% and 76% retracement levels dating back to the low of the financial crisis nearly ten years ago.
The obvious disdain for GE stock works in favor of contrarian-oriented investors, though expecting an overnight turnaround, if any, isn’t realistic. Having said that, a couple monthly chart doji decision candles and a deeply oversold stochastics condition is promising.
Bottom line though, with no guarantees on the price chart and the latest victim being Monday’s dismantling of an emerging two-month long uptrend, a bullish modified spread combination is worth investors’ consideration.
GE Stock Bullish Modified Spread Combination
Reviewing GE stock’s options board and with shares at $13.71, I’m favoring the sale of the Jan $12/$11 put spread and purchase of the Jan $16/$19/$22 call butterfly for a combined debit of 5 cents.
This moderately bullish position offers a nice margin of safety with only 5 cents at risk above the sold $12 put strike. That’s nearly 12.5% below the current GE stock price and a full 6% below the March low.
If General Electric shares collapse below $11, this spread trader contains his or her exposure to $1.05 no matter what happens. That’s a nice insurance policy to hold and could allow for the purchase of stock at an even deeper discount below the put spread.
On the upside, a moderately bullish long butterfly position offers a wide profit zone in-between $16.05 to $21.95. The max payout is $2.95 if GE stock lands on $19 at expiration.
That’s a long shot, of course, as both time and price need to cooperate perfectly. However, at this point the strategy probably has a better chance of paying investors something meaningful versus questionable income from an at-risk dividend.
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.
