General Electric will report first-quarter earnings in late April.
HUSSEIN FALEH/AFP/Getty Images
The investor argument over General Electric that has lasted since early March will likely end when the company reports earnings in late April.
After a month of digesting major financial announcements from GE (ticker: GE), investors seem ready to take the stock higher, recent trading suggests.
The stock is consolidating around $13.45, potentially providing a base for shares to move higher after the April 27 release of first-quarter earnings.
Without doubt, much rides on GE’s ability to produce constructive financial results and a strategic narrative that demonstrates to investors that recent surprise decisions, including the sale of GE’s aircraft leasing business, shrinking GE Capital, and commencing a one-for-eight reverse stock split are important steps to return GE to better days.
At the moment, GE’s stock is within striking distance of the 52-week high of $14.42. The stock has twice bounced higher after recently falling into the $12 range, reinforcing the notion that the earnings report will be an especially pivotal moment.
To pre-position for the stock to rally higher into a new trading range in reaction to earnings, aggressive investors can sell GE’s May $12 puts and buy GE’s May $14 calls. The risk reversal–that is, selling a put and buying a call with a higher strike price but same expiration–expresses a view that GE is poised to rally, and a willingness to buy the stock should it not. The trade cost 31 cents when the stock was at $13.48.
The May expiration was chosen to give analysts, and investors, several weeks to digest the news. If the thesis is correct, analysts will bullishly rerate the stock, and investors will chase the stock higher.
Should GE’s stock be at $16 at expiration, the calls are worth $2. If the stock is at $11 at expiration, investors are obligated to buy the stock at $12, or to adjust the puts in the options market to avoid assignment. Rolling the puts–that is moving them to another expiration and strike–almost certainly will cost money.
As a matter of discipline, be mindful of the 90% rule. Should profits on the put or call reach that level, consider taking profits. If the stock craters on the earnings report, investors can shutter the position, or stay in the game.
The trade’s great risk is that the stock reacts poorly to the earnings news, and plummets below the put strike price. If that happens, investors will be in the potentially unpleasant position of managing a put position with a strike price below the stock price.
To be sure, keying off a stock’s patterns and market atmospherics to trade options is tantamount to dancing in a tiger cage. Investor sentiment and market conditions are notoriously volatile, but therein lies the attraction.
It is hard to imagine that GE’s management team will seriously impede the primary investor narrative on the earnings call that GE is on the road to recovery. Moreover, the company’s turnaround theme may have a special appeal when the Standard & Poor’s 500 Index, and so many other stocks, are trading at historic highs.
During the past 52 weeks, GE stock has ranged from $5.48 to $14.42. So far this year, GE stock is up about 23%, compared with about 5% for the Standard & Poor’s 500 Index. The stock is up about 93% over the past year, compared with 65% for the benchmark index.
The outperformance is impressive, but the percentage gains are deceiving. The stock has advanced off such a low price that the gain is bound to stand out. Now, it’s up to GE’s leaders to show investors that the company deserves to reclaim its former gravitas.
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
