Options Update: General Electric Bears Prompt Surge in Put Volume
Could General Electric
(
GE |
Quote |
Chart |
News |
PowerRating) be the next big U.S. corporation taken down by the current crisis in the global financial system? The mainstream media has been filled with analysts and experts recently proclaiming their beliefs to the contrary, stating that GE is sound due to its diversified structure.
They have a point on that front, as than 50% of the company’s business lies in the manufacturing of light bulbs, jet engines, locomotives, water treatment plants, and other goods. But these repeated assurances that “everything is OK” with GE have done little to prevent nervous investors from bailing on the stock. In fact, GE has plunged more than 36% on a year-to-date basis, dropping 20% in September alone.
The problem is that GE’s capital-financing arm accounted for nearly half of the company’s net earnings last year – about $10.3 billion in commercial finance and GE Money. Furthermore, the finance division has extensive holdings and exposure to the volatile energy sector, as well as real estate and credit cards. In a recent interview with the Associated Press, Noel M. Tichy, a professor at the University of Michigan School of Business and former head of GE’s Leadership Development Center, attempted to assuage investors by stating that GE’s finance business is “… still triple-A rated. They don’t have to go outside for cash. They’re in a good situation …They don’t have close to the exposure others have.”
In the eyes of investors, however, exposure is exposure. Even some analysts have taken a negative view of GE, with Eric Boyce, portfolio manager at Hester Capital Management, stating that “No one is immune in this market and no one has been spared and they [GE] certainly are in that basket.”
As such, even if GE can insulate itself from some of the financial fallout, the company is not completely free of risk. Options traders have picked up on this potential weakness with a fervor, sending more than 44,711 GE puts across the tape so far today, placing the stock on our Intraday Volume Explosion List and more than doubling GE’s average daily put volume. But today’s attention to puts is certainly not a new development, as combined data from the International Securities Exchange (ISE) and the CBOE indicate that 37,756 puts were bought to open on GE during yesterday’s trading.
The activity that caught my eye> today was the more than 7,000 GE puts that traded on the stock’s out-of-the-money October 21 strike. Open interest at this soon-to-be front-month option totals just 6,389 contracts, indicating that today’s volume could be the initiation of fresh positions on the shares. Furthermore, as the chart below hints, a majority of this activity could be of the buy-to-open variety, meaning that options speculators are looking for an extended decline from GE.
Glancing over GE’s October 21 put volume today, I noticed a grouping of trades totaling 824 contracts which crossed at the same time on the same exchange, hinting that they could be part of a larger position. I’ll be using these 824 contracts for today’s put-buying example.
The Anatomy of a GE Put Position
Diving into today’s put-buying example, the hypothetical trader purchased 824 GE October 21 puts for $1.40, or a total outlay of $115,360 — ($1.40 * 100)*824 = $115,360. For this trade to reach breakeven, GE would need to fall about 16% to $19.60 per share. We arrive at this by subtracting the cost of the option ($1.40) from the strike of the purchased 21 put ($21 – $1.40 = $19.60). The total loss for this position is limited to the initial investment of $115,360.
Such a move in the current market environment is certainly not out of the question, especially with GE’s heavy exposure to the financial sector. Before we pass judgment, however, let’s see if the stock’s sentiment or technical backdrops provide any drivers or roadblocks that could affect the trade.
Getting Technical
The technical picture for GE definitely offers a nice backdrop for an October 21 put. The shares have plunged more than 44% during the past year, falling steadily under resistance from their 10-week and 20-week moving averages. Furthermore, the shares have breached long-term support in the 24 area and have recently tested support at the 22 level – a region GE last saw in February 2003. Traders interested in an October 21 put should keep an eye on the 24 level, as a close above this region could indicate an end to short-term selling pressure. Meanwhile, a breach of support in the 21 region could mean that GE’s poor price action is off to the races once again.
The Sentiment Drivers
The difference between GE and several of the financial stocks that I have covered in recent editions of Options Update is the stock’s sentiment backdrop. Investors have very little confidence in the security, as its Schaeffer’s put/call open interest ratio (SOIR) of 1.21 indicates that puts easily outnumber calls among near-term options. What’s more, this ratio ranks above 94% of all those taken during the past year, hinting at extreme bearish sentiment from the group.
However, Wall Street analysts have refused to capitulate to GE’s downtrend. Zacks.com reports that 6 of the 12 analysts following the shares still rate them a “buy” or better. Furthermore, GE’s average 12-month price target rests at $32.29 per share, a 37% premium to the stock’s current trading range. Any downgrades from this bullish bunch, either in terms of ratings or price targets, could increase selling pressure on the security.
The Verdict?
Despite today’s wild swings in GE shares (the stock was off 4% when I started writing, and is now sitting on a gain of 4%), I would seriously consider an October 21 put. If the shares fail to overtake the 24 level, it could make for a nice entry point for a short option position on the security. The stock is clearly vulnerable to the pitfalls of the financial sector, and with Morgan Stanley, Washington Mutual, and Goldman Sachs waiting on the sidelines to potentially create havoc in the sector, GE’s technical footing is far from solid. Couple these potential bombshells with the lingering optimism on Wall Street, and we have the potential for a sharp downside move in GE shares.
However, GE options traders should be aware that the stock’s options are relatively expensive at the moment. GE’s current Schaeffer’s Volatility Index rests near an annual high at 0.85, as market makers are pricing in the potential for big moves in the underlying shares. Furthermore, implied volatility on the stock’s October 21 put arrives at 101%, compared to 1-month historical volatility of about 49%. With the options more expensive than usual, investors will need a bigger move in the stock to realize a profit.
Newly revised and updated, Bernie Schaeffer’s home study program, “10 Days to Successful Options Trading,” provides a foundation for your options trading success. Includes easy-to-follow guide, CD, DVD, and a special report — Click here to learn more.
Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.