Options action: How red can a blue chip get?


Disclaimer: This post is intended for educational purposes and is not a trade recommendation. Options trading may not be suitable for all investors.

It was once the world’s biggest company, but bears are circling.

General Electric (GE) got cut in half last year, and has lost another quarter of its value so far in 2018. This morning a huge options trade looked for the once-mighty industry to keep falling into the next quarterly report:

  • A block of 85,000 July 12.50 puts was bought for $0.32.
  • At the same moment, 42,500 July 14 puts were sold for $1.16, but volume was below open interest.
  • It looks like an existing downside trade in the 14s was closed, rolled to the lower strike and doubled in size.
  • The transaction was the single largest trade in the options market today, and follows similar activity last month.

Puts fix the price where a security can be sold, so they can appreciate when shares decline. Today’s transaction let the investor collect a credit of $2.2 million and increased their leverage to a bigger drop through $12.50 — a level GE hasn’t seen since mid-2009. If the stock fails to decline that far, the contracts will become worthless. See our Knowledge Center for more.

GE fell 1.33 percent to $13.02 in midday trading. Earnings are due in the pre-market on July 20, the same session today’s options expire.

The company’s struggled with a convoluted business structure, stagnant electric-turbine sales and worries about its balance sheet. It jumped after beating estimates on April 20, but has slipped back below its 50-day moving average this month. That could make some chart watchers think the longer-term downtrend remains intact.

Puts account for a bearish 72 percent of GE’s total option volume today.

General Electric (GE) chart, with 50-day moving average
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.