Options trader bets big on more GE gains

Options Action: GE rally ahead?
Options Action: GE rally ahead?   

After General Electric's big rise on Friday, one trader is betting that the stock will hold its recent gains for the next several months.

Shares of GE jumped over 10 percent last week after the company announced it will be selling off a huge chunk of financial and real estate businesses and initiating a $50 billion share buyback program. On Monday morning, one trader appeared to bet that the stock will keep at least keep its newfound gains, if not move higher still.

Monday's options volume was three times its daily average. Bearish bets outpaced the bulls by a ratio of 2-to-1. However, a series of trades using a strategy known as a "risk reversal" shows that not everyone was down on the stock.

Specifically, when the market opened, a trader bought 2,000 contracts of the December 30-strike calls for 65 cents each. To pay for that transaction, the trader simultaneously sold the same amount of 26-strike puts for the same date for a price of 85 cents. Since each contract controls 100 shares, the trader took in $40,000.

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But it appears the trader wasn't done yet, or else someone followed suit. A second trade was executed 15 minutes later with the same strike prices and on the same size. This time, though, the trader was able to collect $68,000. Thus, if the trade was put on my a single trader, that party took in a total $108,000 by simultaneously buying the December 30-strike calls and selling the 26-strike puts.

So what's the impetus behind the complex strategy?

"If the stock is between $26 and $30 on December expiration, they take the premium in and they have a lot of leverage to the upside," explained Dan Nathan, co-founder of RiskReversal.com.

The trade's risk is if the stock falls back below $26. If that happens, the trader would be forced to buy GE shares at that price even if the market values is less.

Shares of General Electric closed at $27.63 on Monday, 3 percent lower than its Friday close, but opened slightly higher on Tuesday.

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