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General Electric Company (GE) Trader Sees a Slow Churn Ahead

General Electric Company LEAPS are used to initiate a short straddle

by 5/21/2014 11:15 AM
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Option Brief: Roughly 12,000 calls and 4,400 puts have changed hands on General Electric Company (NYSE:GE) this morning. Diving deeper reveals that unlike recent activity in GE's options pits, a portion of today's early call and put action has centered on two LEAPS strikes, as one trader eyes minimal price movement over the next eight months.

Within an hour of the opening bell, two symmetrical blocks of 3,000 contracts changed hands at GE's January 2015 26-strike call and put. Both blocks were sold at the respective bid prices of $1.41 and $1.43, resulting in a net credit of $2.84. Meanwhile, volume outstrips open interest at each option, indicating the initiation of new positions.

The ultimate goal for playing this short straddle is for General Electric to finish right at $26 at January options expiration. In this best-case scenario, both options will expire worthless, and the trader can pocket the net credit received as her maximum potential reward. However, the speculator can still profit as long as GE finishes between the two breakeven marks of $23.16 and $28.84 (strike minus the net credit, strike plus the net credit) at January options expiration.

By selling the two options, this speculator has significantly increased her profit potential compared to just writing a lone put or call, but she has also upped the risk factor. Specifically, should GE take a sharp tumble or stage a big rally ahead of expiration, losses to the downside can be quite significant and are theoretically unlimited to the upside.

On the charts, GE has spent the majority of the past year churning between $23 and $28, translating into a year-over-year gain of about 11%. More recently, the shares were seen lingering near $26.43. Off the charts, France's Economics Minister Arnaud Montebourg said General Electric Company (NYSE:GE) needs to re-evaluate its offer for Alstom SA's power-equipment unit, calling the current $17 billion bid "unacceptable."

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