GE's General Wisdom
Last Friday, we took a look at the travails of our parent company, General Electric . The stock has been hammered by a lousy economy and the perception that GE is actually a financial masquerading as a industrial conglomerate.
Fair or not, the stock has lost two-thirds of its value in the past 52-weeks. GE trades at its lowest multiple in decades. Its dividend yield is nearing 10%, also a record. The options market, as well as the equity market for that matter, appear to have factored in a cut. So, clearly the risk is here, but the reward is also quite apparent.
Perhaps that's why we saw such bullish option activity on the name in the form of heavy put selling at the 9 and 10 strikes for both the February and March contracts last week. Essentially, options traders are saying they are willing to get long GE stock at $9 or $10 bucks in exchange for collecting the premium for the sold option.
And the uncertainty surrounding the name is perhaps one of the reasons why selling puts against it is so attractive, according to out panel. Implied volatility on GE stock is at or near record levels, as investors fret about additional losses. "Typically, you'll see GE trade at a 30 implied volatility. Now its trading in the 80s. So people are betting on huge moves in the stock," said Brian Stutland, president of Stutland Equities and an "Options Action" contributor. That pumped volatility means fatter prices for both puts and calls, and potentially bigger returns for those looking to sell options.
Case in point: Mike Khouw's trade on Friday's show.
Mike recommended selling the GE March 11 Puts for $1.30. Today, those puts are selling for $0.70, netting a cool $60 bucks, as GE stock has rallied 14%, or $1.60 today. Not a bad pick up in this or any market. And he's sticking with his trade. “I wouldn’t recommend most investors buy premium unless they have a very strong view about the stock’s near-term price direction," Said Khouw. "Put sales and covered writes are strategies best implemented for investors who are comfortable owning stocks at a certain level, and, if they’re already long a stock, are comfortable selling them at a pre-determined level as well."
One point to highlight on Mike's trade that we missed in the show: the return on capital. If you bought 100 shares of GE stock at Friday's closing price, you'd have to set aside about $1110. But with Mike's put sale, you'd only have to set aside $110 bucks to cover the trade. So let's do the math: spend $110 to make $60, or spend $1110 to make $160.
The Action continues this Friday.