Schaeffer's Trading Floor Blog

January Call Players Swarm General Electric on Earnings Eve

Front-month call activity spikes on GE ahead of earnings

by 1/17/2013 1:47 PM
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Ahead of tomorrow's turn in the earnings confessional, General Electric Company (NYSE:GE - 21.21) has seen an influx of call activity today. Roughly 38,000 calls have crossed the tape so far -- marking a 48% increase over the equity's expected intraday volume, and almost tripling the number of puts traded. Traders seem to be placing last-minute bets on GE, with nearly 7,600 calls trading at the January 2013 21 strike. The contracts were exchanged at a volume-weighted average price (VWAP) of $0.38.

Upon closer inspection, it appears that a large chunk of these near-the-money calls changed hands at the ask price, implying they were bought. Meanwhile, implied volatility has surged more than 6 percentage points during the course of the session, indicating the initiation of new positions. If today's traders were, in fact, purchasing these calls to open, GE must climb north of breakeven at $21.38 (strike price plus the VWAP) by tomorrow's close in order for their optimistic front-month bets to be profitable. This is just a stone's throw away from the stock's current perch.

GE is certainly no stranger to bullish speculation. In fact, the equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio checks in at 3.33, confirming traders have bought to open more than three calls for every put during the last 10 weeks. This ratio arrives in the 88th percentile of its annual range, denoting a stronger-than-typical preference for calls over their bearish counterparts.

Technically speaking, GE sports a year-over-year gain of more than 13%. Also, a look at the charts shows that the stock is on pace to close yet another month atop its 10-month moving average, which has acted as firm support for the past 12 months. As alluded to earlier, the company is due to report fourth-quarter earnings before tomorrow's open, and has surpassed consensus bottom-line projections in three of the past four quarters. Analysts, on average, are expecting a fourth-quarter profit of 43 cents per share. Another upbeat earnings surprise could push the shares higher, translating into a win for today's bullish bettors.

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