To say that General Electric Company (NYSE:GE) has been a disappointment this year would be an understatement. GE stock is down more than 30% year-to-date, and the company has yet to offer up a convincing turnaround plan.
What’s more, the most recent earnings report offered little in the way of hope for a rebound, with CEO John Flannery leaving investors to wait for the company’s Nov. 13 investor update for any real GE news.
Now, with GE stock beaten down and the company set to offer up a restructuring plan next week (including a potential spinoff of a division or two), contrarians might be tempted to double down on bullish bets. It’s a risky play that could pan out, but GE’s stock price has yet to provide any indication that it intends to move higher.
Click to Enlarge Specifically, GE stock has blown through several key support layers in the past two months. The shares are now being squeezed between round-number support at $20 and declining pressure from their 10-day moving average.
What’s more, any near-term gains are sure to be capped at GE stock’s 20-day moving average, which is quickly descending into the $21 region. That’s not a lot of upside to go on.
Meanwhile, the downside risks are considerable if GE breaches support at $20.The next level of technical support doesn’t emerge until near $18 — the home of GE’s 2012 lows.
Sentiment is also not very supportive of a directional call on GE. Currently, Thomson/First Call reports that half of the 16 analysts following GE stock rate the shares a “buy” or better, leaving ample room for both upgrades and downgrades. The 12-month price target also rests at a lofty $27.60, meaning there is ample room for target price cuts should things go sour once again.
Turning to GE’s options backdrop, we find that speculative traders are likely more optimistic that they should be. The December put/call open interest ratio rests at 0.71, with calls still more popular that puts despite GE stock’s poor price action.
Overall, December implieds are pricing in a considerable move for GE stock of more than 7%. This places the upper bound at $21.50, with the lower bound coming in near $18.50. With volatility this high, directional trades are going to take a hit in terms of profitability.
2 Trades for GE Stock
Call Sell: If you’re holding GE stock and want out, or if you just want to pull in a little profit while waiting for General Electric to finally get in gear, then a Dec $22 call sell position could accomplish just that. Such a trade is especially useful if you already own GE stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $22.
At last check, this option was bid at 15 cents, or $15 per contract. A sold call allows you keep the premium as long as GE stock closes below $22 at expiration. If GE rallies above $22 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.
Put Spread: If next week’s investor update doesn’t go well, it’s “look out below” for GE stock. On way to take advantage of such a selloff would be to open up a December $19/$20 bear put.
At last check, this spread was offered at 36 cents, or $36 per pair of contracts. Breakeven lies at $19.64, while a maximum profit of 64 cents, or $64 per pair of contracts — a 77% potential return — is possible if GE stock closes at or below $19 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
