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General Electric (GE) Garners Attention from Option Bulls

Breaking down a bullish options spread on GE

by 5/2/2013 10:32 AM
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The shares of General Electric Company (NYSE:GE) have added 5.1% since touching a post-earnings low of $21.11 on April 22, with the stock now trading at $22.19. What's more, it looks like one trader is betting on more upside for the blue chip in the intermediate term, but employed options instead of buying GE shares outright.

Late yesterday, symmetrical blocks of 5,000 contracts traded on the July 22 call and put. The calls crossed at the ask price of $0.84, suggesting they were bought, while the puts traded at the bid price of $0.69, implying they were sold. Open interest skyrocketed on both sides overnight, pointing to the initiation of a synthetic long stock position.

Like a GE shareholder, the strategist is hoping for an extended rally for GE. However, instead of purchasing the stock or a "vanilla" 22-strike call, the investor simultaneously sold the 22-strike puts to limit his cost of entry, resulting in a net debit of $0.15 per pair of contracts. Now, the trader will make money with each step north of $22.15 (strike price plus net debit), and risk is limited to $0.15 as long as GE stays atop the 22 strike through July expiration.

However, the sale of the puts also increases his risk, as a breach of $22 would place the contracts in the money -- meaning the strategist could have to buy GE shares at $22 apiece, representing a premium to what he'd pay on the Street. Had he simply bought the July 22 calls for $0.84 apiece, his breakeven would be higher at $22.84 (strike price plus premium paid), but his loss would be capped at $0.84 per contract.

From a broader sentiment standpoint, bullish betting is nothing new for GE. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open more than two calls for every put during the past two weeks, as evidenced by the security's 10-day call/put volume ratio of 2.29. Likewise, GE sports twice as many "buy" or better analyst ratings than "holds," with not a single "sell" suggestion in sight.

Technically speaking, General Electric has tacked on about 5.5% so far this year, but has spent the past few months dawdling in the $22-$24 region, home to its ascending 10-month moving average. In fact, earlier this week, another options trader honed in on the 22 strike, but used both calls and puts to gamble on long-term stagnation on the charts.


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