General Electric (NYSE:GE) shares are starting to percolate. Accumulation days are on the rise, and its price trajectory has finally shifted higher. A rare string of positive news articles has also hit the wires and is lending a hand to the GE stock recovery attempt.
I’m as intrigued as the next bottom fisher but have to report that GE stock remains a high-risk ticker to shop, at least until longer-term ceilings crack and it finally departs the seven-month range.
For those tempted to take a bite after the past two weeks of excitement, however, I have a powerful trade suggestion guaranteed to shift the odds in your favor. It will require capping your upside profit potential to a 32% return on investment, but it’s a small price to pay in exchange for the high probability.
Besides, if GE starts to take flight, you can tack on additional shares of stock to re-open your profit potential. More on that in a minute, but first, let’s investigate its improving price chart.
GE Stock Chart
The principal reason that General Electric remains a risky purchase is the ugliness of its weekly trend. As wonderful as the last few weeks have been, the gains have barely put a dent in the long-term downtrend. If you squint, you’ll see that prices did push above a minor pivot high. I’ll give buyers credit for that minor victory, but make no mistake — bears are still very much winning the war.
To entice chart watchers and convince pessimists that the tide is turning, GE must climb above $8.50. That marks the high of its multi-month range as well as the descending 50-week moving average.
Rising above it would officially turn the weekly trend higher and give bulls ammo to start defending their stance. Until then, I suggest reining in your enthusiasm over the awakening.
As far as the daily chart goes, I see two developments worth mentioning. First, the short-term trend is officially running higher. A higher pivot high and higher pivot low have developed. At the same time, the 50-day and 20-day moving averages are starting to rise.
High volume confirmed the past two rallies by revealing institutional inflows. The $8.50 level still stands tall as the price to breach before bulls can really get the party started. In addition to the weekly significance mentioned previously, it would also launch prices past the 200-day moving average.
General Electric Naked Puts
While some cautious buyers might wait for the bigger picture to turn even more constructive or the looming earnings announcement to pass, I could see wading into the waters with a neutral to mildly bullish options strategy. Naked puts fit the bill by offering a tasty return on investment for your troubles.
Suppose you sold the November $7 puts for 37 cents. You are obligating yourself to buy 100 shares of stock at $7. But because of the premium received, your true cost basis is $6.63. Based on Monday’s closing price of $7.29, that’s a 9% discount. It represents the first big advantage of naked puts. You get paid to purchase shares on sale.
That $6.63 also acts as your breakeven. As long as GE stock doesn’t fall more than 9% over the next month, you’ll come out a winner. With this strategy, we’ve increased our probability of profit well above the coin flip that is purchasing shares. If prices rises, stagnate, or fall slightly, then the position bears fruit.
And, as a consolation to GE falling too far, you have a 9% buffer before you start incurring losses at expiration.
The low price tag of General Electric translates into a small margin requirement for the naked put. The initial capital required should only be around $115. Capturing $37 on a capital outlay of $115 results in a potential return on initial investment of 32%. That’s attractive by naked put standards.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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