Options Trader Sees No Happy New Year for Ailing Blue Chip

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Someone seems to think this year’s worst-performing S&P 500 member won’t have a happy New Year.

Here’s a breakdown of a large options trade in General Electric (GE):

  • A block of 12,500 December 8 puts was sold for $0.79 and an equal number of December 7s was bought for $0.30. Volume was below open interest in each, which indicates an existing bearish put spread was closed.
  • At the same time, 30,000 January 6.50 puts were bought for $0.20 and 30,000 January 5.50 puts were sold for $0.05. That was a new bearish spread.

Remember that owning puts fixes the price at which a security can be sold, while selling them generates income and creates an obligation to buy. The two strategies can be combined in a spread, letting traders control a move between two levels. (See our Knowledge Center.)

In the case of today’s transaction, it looks like the investor had a winning trade in the December spread. He or she sold it for $612,500 and entered the January position for $450,000 — effectively taking $162,500 off the table. They now have the potential to make more than twice as much profit from a bigger drop because more contracts are at play.

General Electric (GE) chart since the start of 2017, with 50- and 20-day moving averages.

GE fell 2.24 percent to $7.41 and has lost 57 percent of its value this year. Just two years ago the former industrial giant was among the 10 largest companies in the world by market cap.

A combination of slowing business and management turmoil has exacerbated its slide. Perhaps even worse has been the drag from its massive pile of once AAA-rated debt that’s now at risk of falling to junk.

The bearish roll in GE is the largest options transaction for any equity in the entire market today.

Disclosure: This post is intended for educational purposes only and shouldn’t be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.