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Near-Term Weakness Seen in General Electric (GE)

Conservative option bear buys a put spread on GE

by 7/3/2013 10:31 AM
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As General Electric Company (NYSE:GE) continues to consolidate sideways -- currently perched at the $22.83 level -- one bear made a conservative bet on modest downside in the shares, banking on a drop of roughly 4% over the next six weeks (based on Tuesday's closing price of $22.90). This speculative action contributed to a 55% mark-up in overall put volume in GE options pits yesterday.

Midday on Tuesday, symmetrical blocks of 3,000 contracts traded simultaneously on GE's August 22 and 23 puts. The 23-strike put traded at the ask price of $0.56 per contract, while the 22-strike puts went off at the bid price of $0.25 apiece. Given that open interest expanded by more than 3,000 at both strikes today, it appears this action was on the opening side as a long put spread was initiated through the sale of the lower-strike put and the purchase of the higher-strike option. The trader scooped up this bearish spread at a net debit of $0.31 for each pair of contracts.

The best-case scenario for this trader is if GE is trading at or below the $22 level when the options expire on Aug. 16. Profit is then maximized at $0.69 (or the difference in strikes less the net debit). Should GE instead be trading at or above $23, losses are capped at 100% of the debit paid. Breakeven -- at expiration -- is $22.69, or the purchased strike price minus the debit paid.

Prior to August options expiration is GE's next earnings report, the morning of July 19. Although GE has edged past analysts' estimates in six of the past eight quarters, it has also dropped fractionally lower (on average) in the day and week following its results.

There has been a recent sea change in the GE options pits, as speculators have gradually shifted from the call side to the more bearish bandwagon. The stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) of 0.56 is now higher than 82% of the past year's worth of similar readings. In other words, the rate of buy-to-open put activity is faster than usual.

On the charts, General Electric Company (NYSE:GE) hasn't done much to reward the bulls of late. In 2013, the stock has gained just 8.6%, underperforming the broader market. Widening the scope, the shares have increased just 11.6% on a year-over-year basis, compared to a 17.5% surge in the S&P 500 Index (SPX).


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