The Seven-Figure Bet on a 10% General Electric Company (GE) Slide

Even though General Electric Company (NYSE:GE) appears to be positioned well on the charts, an option trader placed a $1.6 million bearish bet

Feb 1, 2016 at 12:05 PM
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General Electric Company (NYSE:GE)​ has performed well in recent months, topping the S&P 500 Index's (SPX) performance by almost 7 percentage points over the past 60 sessions. The stock is down 1.1% today at $28.77 due to broad-market headwinds, but still sits above a double-barreled layer of support. Specifically, GE's recent pullbacks have been contained by not only the $28 level, but its closely watched 160-day moving average


Apparently, one bearish speculator isn't too concerned about this promising technical set-up. Shortly after the open this morning, sweeps consisting of 20,000 April 26 and 30,000 March 26 puts were simultaneously bought to open, according to Trade-Alert. The April-dated contracts were purchased for 41 cents each, while the March options cost 28 cents each, bringing this trader's initial cash outlay to over $1.6 million (premium paid * number of contracts purchased * 100 shares per contract). Given the size of the wager, this may be an institutional transaction.

The respective trades anticipate a move south of $26 from GE before March and April options expiration -- a nearly 10% decline from current levels. It would also mark a move down to levels not seen since the stock's early October bull gap. It's worth noting, too, that the buyer took advantage of relatively muted premiums on GE's near-term options. This is according to the stock's Schaeffer's Volatility Index (SVI), which, at just 21%, sits below 70% of all readings from the past 52 weeks. 

Interestingly, the aforementioned transactions account for about three-quarters of GE's intraday option activity, and has put volume at three times the average midday level. Making this wager that much more unusual is the historical behavior of the stock's speculators. GE's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio stands at 2.42. Not only does this mean over two calls have been bought to open for every put over the past two weeks, but the reading tops 71% of all others from the previous 12 months. Said simply, call buying has actually been the strategy of choice among GE option traders lately. 

This call bias is further illustrated by the blue chip's Schaeffer's put/call open interest ratio (SOIR), which can tell us how short-term speculators are positioned. In GE's case, this reading is 0.74, indicating call open interest outweighs put open interest among contracts set to expire within three months. What's more, three of the stock's four top open interest positions are calls. 

Looking beyond the options pits, short interest fell dramatically on General Electric Company (NYSE:GE)​ over the two previous reporting periods. By the numbers, short interest dropped by over 25%, and has been on the way down since exploding to an all-time high in November, when almost 400 million GE shares were sold short. As it stands now, a little more than 119 million shares are controlled by short sellers, and it'd take these bears just under two days to buy back their bets, at average daily volumes. 

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