Options Strategy Fears Bounce Is Over For This Ailing Blue Chip

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Is the bounce over for a once-might industrial stock? One big options trader is treading cautiously before quarterly results.

General Electric (GE) took a beating in 2017 and 2018. It rebounded sharply this year, at one point rising 76 percent from its lowest price. More recently it’s been trapped in a range and today’s largest options trade is bracing for a potential drop.

Here’s a breakdown of the activity in the middle of the lunch hour:

  • A block of 116,000 31-May 9 puts was bought for $0.40.
  • At the same second, 116,000 31-May 9.5 calls were sold for $0.40.
  • That nets out to a cost of zero, aside from commissions.

Puts fix the price where investors can sell a stock, so they generally make money to the downside. Short calls generate income and create an obligation to deliver shares if reach a certain level.

General Electric (GE) chart with moving averages and levels targeted by collar.
General Electric (GE) chart with moving averages and levels targeted by collar.

Parsing the Options Activity

Selling calls can be an extremely risky business when done in isolation, but Monday’s transaction was almost certainly paired up with a large position in GE shares.

Here’s what it could mean:

  • The investor likely owns at least 11.6 million GE shares. (That’s 116,000 contracts X 100 shares per contract.)
  • If GE drops under $9, they’ll get at least $9 per share — no matter how far it may decline.
  • If GE rallies over $9.50 before the end of May they’ll have to exit their position at that level.
  • Between $9 and $9.50, nothing happens and the options expire worthless.

Known as a collar, the strategy is a common hedging technique. It essentially lets investors surrender potentially big gains (in this case over $9.50) in exchange for avoiding big losses (in this case under $9). See our Knowledge Center for more on managing risk with options.

GE fell 0.95 percent to $9.27 in afternoon trading. It’s gone pretty much nowhere since the end of January, and squeezed into an increasingly tight range between its 100- and 200-day moving averages.

The next big event for the company will likely be first-quarter earnings in a little more than a week, on Tuesday, April 30.

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