Two General Electric Options Trades to Consider

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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…

a) Bankrupt

b) $12

c) $20 or more

d) Who Cares?

You can leave a comment below.

Jacob Mintz

Quick Profits, Controlled Risk

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.

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Comments

  • Richard M.

    How about buying the January 2021 $5 deep-in-the-money Calls for about $4.00 and selling short term (2-3 months out) Calls (Dec. 2018 $8.50 for ~.35). Effectively setting up a Diagonal Call where the objective will be to continue to write short term Calls every 2-3 months collecting the majority of the cost of the long Call over the next 2 years. If GE manages to right the ship and trade higher (>$10/share), the Diagonal should be making money by Jan. 2021. This could be a Diagonal that gets the long side rolled out a year from now for even greater gains over a longer term recovery.
    Initial risk is ~$3.65/share diminishing with each successive short Call. I believe GE will recover eventually and I’m willing to wait it out. This sort of Diagonal Call could be a good approach to make money through that recovery with limited downside risk.

  • Richard, I like the general strategy, though the one issue I would have is if by some chance GE rallies sharply in the next month the 8.5 call that you sold could take you out of the position. Maybe something like the January 9 or 10 call which would give the trade more room to the upside.

  • GE, different from Sears holds a lot of viable intellectual property: patents and the name. So, while a retail company it has a big business voice. Short on capital, I see GE purchased and believe the CEO will make that happen. It may be he will get lucky but there is just so much competition but if he can figure out price competition and a b-b as well as b-c quality product line, he’s got a chance. If he can get started and build some momentum, build up IP by extension, I would bet shareholders would want to sell. To whom? Well, Philips, possibly HP even though HP doesn’t know the business, LG, or others. But it is going to take a lot to rebuild the value proposition of the brand. People don’t like to buy insurance on appliances so they are looking for the lost and forgotten it seems reliable product. I don’t see it rallying sharply soon because it has no solid fundamentals.

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