General Electric Company (NYSE:GE) stock is awful and it’s going to zero. Or at least that’s the sentiment this week. Needless to say that the investor event that the company held earlier this week did not go as management hoped for GE stock.
Wall Street hated what they heard and the stock was punished hard. As a result, GE stock fell 11% in just a few days. That’s on top of an already disappointing year. And this makes the stock down over 40% in 12 months. Investing for the long term is clearly not paying the investors and GE stock.
In their note this week, management promised better things to come but the message was not clear as to how. It’s hard to envision a rosy future without specifics. So the negative reaction is reasonable. Until then the stock will be hated and money will flow out of GE into other things.
Yesterday the prevailing opinion was to sell GE and buy the Coca-Cola Co (NYSE:KO). It makes sense since one is lost, and KO is looking to enter into new venues that are very promising.
But while everyone hates GE I see an opportunity. I want to generate income from what other people fear.
Instead of buying GE stock and hoping for rally, I will sell premium against downside fears so I can leave much room for error. I did this for Twitter Inc. (NYSE:TWTR) when it had its dark days. At the time, betting on upside movement was a lost cause, but I was successful in selling risk against extreme downside fears.
Fundamentally, GE sells at a 20 price-to-earnings ratio and a price to book of only two. On paper, this is not expensive. But for simplistic reasons, I compare it to the best company on the planet which is Apple Inc. (NASDAQ:AAPL). And it too sells for 20 PE. Most people would rather own that than GE.
I consider today’s trade a somewhat speculative trade in a conservative portfolio and I only do this if I don’t mind temporarily owning GE shares lower.
The idea is to sell puts against what I’d guess to be support — emphasis on guess. Because at the rate it’s falling, no one really knows when the selling will abate. The volume was high and that could be an indication that we are running out of Sellers. However, this is an old company that paid dividends for a long time so the stock punishment could linger. Hence the need for a buffer from current price.
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Then there is the matter of official expert opinions. GE still has too many analysts with BUY ratings. Those are potentially looming negative headlines. Although if they haven’t done it by now they may not do it at all. Yet, I have to consider the possibility.
The Trade: Sell GE Jun 2018 $15 put for 60 cents. This is a bullish trade that has an 80% theoretical chance of winning. But if price falls below my strike then I own shares and accrue losses below $14.40.
Selling naked puts carries a big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the GE $15/$14 bull put spread. Here my risk is smaller yet the spread would yield 18% if it wins.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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