To receive further updates on this General Electric Company (NYSE:GE) trade, sign up for a risk-free trial of Maximum Options today.
Today I’m recommending a bullish trade on General Electric Company (NYSE:GE), which is now down more than 10% this week after reporting disappointing earnings on Tuesday.
This was the company’s first earnings report under new chairman and CEO Larry Culp, and GE missed Wall Street’s third quarter earnings and revenue expectations. It also cut its dividend for the second time this year, this time lowering it from $0.12 to a measly $0.01 per share.
This move will save the company billions of dollars a year, but it also shows the company is struggling. When looking at the 4% fall in total revenues this past quarter, it is easy to assume the worst about the company.
Technically, shares of GE tumbled to their lowest levels since 2009 during Wednesday’s decline and hit single-digits before rebounding slightly to close at $10.10. The stock has now lost approximately 70% of its value since its prior peak around $33 per share in mid-2016, but I think the move has been overdone.
On a monthly basis, GE is now more oversold than it ever was during the depths of the financial crisis, as shown by the relative strength index (RSI) at the bottom of the following chart.
RSI is a momentum indicator, and a reading below 30 typically indicates that a security is oversold and due for a potential reversal to the upside.
Furthermore, on a weekly chart of GE, a divergence between the weekly RSI reading and the stock price has started to form.
While price has been trending lower this year, the RSI bottomed out back in February and has been moving higher since then, creating the divergence. This is also another sign that the downward trend in price could eventually reverse itself.
These divergences take time to play out, however, so I have chosen to use a March 2019 expiration for this debit spread in GE, which will give the trade plenty of time to develop.
Using a spread order, buy to open the GE March 15th (2019) $10 call and sell to open the GE March 15th (2019) $12 call for a net debit of about $0.65.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
Follow our Facebook page to receive each Trade of the Day direct to your News Feed — and join the conversation.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
