THE BACKDROP
GE closed at $32.25 on Dec 20 2016, at the top of its long term trading channel. The stock has lost 50% since, closing at 16.26 yesterday. This downfall has been ugly, with heavy selling volume, especially most recently. There is no telling how much lower the stock will go. Currently, the stock looks oversold on all time frames and could be ready for a bounce-back on any marginally positive news - Perhaps as early as this week when the earnings are announced and we start to hear about measures to fix the business…
THE TRADE
I do not like to catch falling knives, and would not normally be compelled to enter a stock with disappointing fundamentals and such an ugly technical configuration. However, there is an options trade which looks interesting at this stage, and might be worth considering ahead of earnings publication in 2 days. Look to get synthetically long close to the money, and to finance such position by selling a longer, further OTM put.
THE SETUP
1. Sell $15 SEP PUT and cash in $0.94/share (indicative).
2. Buy $17 JUN CALL and pay $0.92/share (indicative).
THE OUTCOMES
If the stock trades up, capture synthetically the full upside.
If the stock trades down, the worst case is to hold GE at $15.
If the stock remains range-bound —> No impact.
THE ALTERNATIVE
For those looking for risk-less opportunities, and do not mind paying for them, look to trade only the second leg (buy call)...
GE closed at $32.25 on Dec 20 2016, at the top of its long term trading channel. The stock has lost 50% since, closing at 16.26 yesterday. This downfall has been ugly, with heavy selling volume, especially most recently. There is no telling how much lower the stock will go. Currently, the stock looks oversold on all time frames and could be ready for a bounce-back on any marginally positive news - Perhaps as early as this week when the earnings are announced and we start to hear about measures to fix the business…
THE TRADE
I do not like to catch falling knives, and would not normally be compelled to enter a stock with disappointing fundamentals and such an ugly technical configuration. However, there is an options trade which looks interesting at this stage, and might be worth considering ahead of earnings publication in 2 days. Look to get synthetically long close to the money, and to finance such position by selling a longer, further OTM put.
THE SETUP
1. Sell $15 SEP PUT and cash in $0.94/share (indicative).
2. Buy $17 JUN CALL and pay $0.92/share (indicative).
THE OUTCOMES
If the stock trades up, capture synthetically the full upside.
If the stock trades down, the worst case is to hold GE at $15.
If the stock remains range-bound —> No impact.
THE ALTERNATIVE
For those looking for risk-less opportunities, and do not mind paying for them, look to trade only the second leg (buy call)...
RISK AVERSE INVESTORS - Take your profits on the options combo and move on.
INVESTORS WHO LIKE MEASURED RISK - Keep the position on, and wait for further improvement over the course of the next 2 earnings releases.