General Electric (GE) has been a total disaster, having lost 73% in the last three years. And last Monday, following another round of downgrades and lowered price targets from Wall Street analysts, the stock made a new recent low, briefly trading below $8.
I have a couple of ideas for General Electric options trades below, but first here is some analysis from Crista Huff, chief analyst of Cabot Undervalued Stocks Advisor, who has been spot-on with her analysis of GE stock, warning her readers to stay away all year.
What to Do with GE Stock
“The company announced larger-than-expected cash flow problems and a huge goodwill writedown. Investors can also expect an overdue and fairly inevitable downgrade of GE’s credit rating. That’s all bad news, which will be widely broadcast in hot-off-the-presses analyst research reports that get delivered to every institutional investor in the world.
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“There are lots of “what ifs?” amid investors’ discussions about GE, and it can be hard to establish a firm foundation for a decision to buy, hold or sell. Fortunately, there’s one undeniable fact that investors can circle back to: stocks that have fallen throughout the year will virtually always continue falling through December 31, due to tax-loss selling. That fact can guide the following three decisions:
“Buy – Buy GE if you want to. The company is not a disaster; they’re not losing money. But if you wait until January 2, when tax-loss selling is over, odds are very strong that you’re going to buy at a price that’s lower than today’s price, and that the stock will probably not fall further.
“Hold – Sure, if you don’t mind watching the share price fall further through December 31. But keep in mind that the dividend is still at risk because the company has not yet solved its cash flow problems.
“Sell – This could be a prudent decision. You can sell GE and put your capital into other investments that have better business prospects, stronger balance sheets, stronger earnings growth, more stable dividends, and/or more bullish price charts.
“For GE shares, I vote “sell”. And if it looks like it might be wise to buy GE on January 2, I’ll definitely suggest that you do so.”
To learn more about Crista’s Cabot Undervalued Stocks Advisor, click here.
Also of note, according to Bloomberg, “The cost to insure against a default by GE for five years climbed to as high as 211 basis points in early trading, credit-default swaps prices from CMA show. That’s almost double what it cost just two weeks ago, and it’s the kind of level that hasn’t been seen for the company since the waning days of the global financial crisis.”
Two General Electric Options Trades
Big picture I have no clue if GE is going bankrupt, or if the newly hired CEO will turn the company around. However, if I wanted to play bankruptcy, or a stock bounce, I might look at these long-term General Electric options trades:
Bearish: Buy the GE January 5 Puts (exp. 2021) for $0.70
If analysts are right, and GE is in deep trouble these puts could work nicely. Though the most you can make on this trade is $430 if the stock were to go to zero.
While the risk/reward in this trade is just OK, buying these puts is likely the best way to play further downside.
Bullish: Buy the GE January 10 Calls (exp. 2021) for $2
I like the risk/reward in this trade. If GE does in fact go bankrupt, the most I could possibly lose is $200 per call purchased. However, to the upside it also buys me two years of exposure to a stock turnaround, with unlimited upside potential.
Will General Electric be like Sears Holding (SHLD) and slowly bleed into oblivion? I am not sure. However, with options you can place cheap bets on such doom, or on a rebirth, in the years to come.
In the meantime, I want to know where you think GE will be in 2021. Will it be…
c) $20 or more
d) Who Cares?
You can leave a comment below.
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.Learn More