Options Update: Put Volume Soars on General Electric Ahead of January Expiration

Shares of blue-chip conglomerate General Electric
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have fallen more than 5% so far today, following negative commentary from Barclays Capital.

According to the brokerage firm, GE’s earnings could rely more heavily on tax benefits than Wall Street expects. The firm said that as much as 20 cents per share of the company’s profit could come from tax benefits.

“Although a negative tax rate may be in expectations, we aren’t sure if the Street is prepared for a contribution of this magnitude,” Barclays wrote in a note to clients this morning.

GE is scheduled to release its quarterly earnings report ahead of the open on Jan. 23. Wall Street is currently expecting a profit of 44 cents per share, down sharply from last year’s profit of 68 cents per share. Historically, the company has matched the Street’s views in all but 1 of the prior 4 reporting periods.

With this in mind, I was looking for a heavy degree of put volume from speculative investors, and was not disappointed. Specifically, more than 50,000 GE puts have changed hands today, nearly tripling the stock’s average daily put volume. Furthermore, this spike in volume has placed the shares on our Intraday Volume Explosion List. However, it was the more than 18,000 contracts that traded at GE’s January 2009 15 strike that caught my eye today, as these contracts expire before the company releases its quarterly earnings report.

General Electric option volume details

The Anatomy of a Valero Energy Put Position

Diving into the options data, I noticed that the majority of today’s volume has traded at the ask price. However, I am unable to confidently define today’s activity as buy-to-open put trading, as open interest at this front-month contract far exceeds today’s volume. As such, we could be looking at the closure of existing put-sell positions. This situation is even more likely given that GE is threatening to break below the 15 level in today’s trading, potentially forcing any January 2009 15 put sellers to provide GE stock at $15 per share. For naked put sellers, i.e. those who do not already own GE shares, this could be an especially bad development.

For the sake of argument, however, let’s see how a buy-to-open January 2009 15 put would play out. A block of 528 January 2009 15 GE puts traded at the ask price of $0.66 at 11:28 a.m. Eastern time. Assuming these contracts were bought to open, the total outlay for this position would be $34,848 — ($0.66 * 100)*528 = $34,848. For this trade to reach breakeven, GE would need to fall about 9.4% to $14.34 per share from the stock’s Monday close of $15.83 before the options expire this Friday, Jan. 16. The maximum loss on this position is limited to the initial investment of $34,848.

By entering this trade, the investor is indicating that he expects GE to drop sharply during the next couple of sessions. The shares are well on their way toward hitting that goal, slipping more than 5% following this morning’s negative brokerage comments. Let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

The stock’s technical backdrop appears very supportive for a January 2009 15 put position. GE has fallen more than 55% during the past 52 weeks, pressured steadily lower by its falling 10-day and 20-day moving averages. Furthermore, these trendlines recently completed a bearish cross – a technical formation that often signals extended losses for the shares. As mentioned above, GE is currently clinging fervently to former support in the 15 area. Should this region fall, we could see a sharp decline due to an unwinding of investor optimism.

Weekly chart of General Electric since August 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

GE’s sentiment backdrop also points toward additional losses for the shares. Options traders continue to expect a rebound despite the poor technical performance, as the stock’s Schaeffer’s put/call open interest ratio (SOIR) of 0.65 ranks below 99% of all those taken during the past year. Furthermore, peak front-month put open interest resides at the January 2009 15 strike. As mentioned in the educational section of SchaeffersResearch.com, heavy accumulations of put open interest can often provide support for an equity. The fact that GE is breaking below this region in today’s trading suggests that selling pressure has considerable momentum in its favor. Naturally, this bodes ill for GE bulls, but could work in favor of a January 2009 put position.

Meanwhile, GE has garnered 4 “buys,” 8 “holds,” and only 1 “sell” from the analyst community. While this configuration leans toward the bearish end of the spectrum, the lack of “sell” ratings leaves the door open for potential downgrades on the shares. Even short sellers are shunning this underperforming equity, as less that 2% of GE’s float has been sold short. Should we see these bulls begin to capitulate to the stock’s long-term downtrend, the shares could suffer from added selling pressure.

Sentiment indicators for General Electric

The Verdict?

Trading options this close to expiration leaves little room for error due to the near absence of time premium in the price of the contract. Still, as Todd Salamone noted in this week’s edition of Monday Morning Oulook, “… when the bears do come out of hibernation during these (expiration) weeks, they come out in force. The average negative week is much larger than those outside of expiration weeks.” Combine this sentiment with the overall bearish outlook for GE, and there is a good chance that a January 2009 15 put could be quite profitable. Personally, I would look more closely at the February 15 put, especially given the potential for extended losses for GE going forward.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.