Boring to bullish? Bold options bet in blue chip industrial
06/13/17

Change is good — that’s how investors felt about a shakeup at one of the world’s top companies.

General Electric (NYSE: GE), after all, has been a cornerstone of global business for more than a century. It’s cranked out everything from washing machines and light bulbs to jet engines, radar, and railroad engines. It was one of the first members of the Dow Jones Industrial Average in the late 1800s and spearheaded the roaring 1920s. It’s been associated with famous Americans ranging from Thomas Edison to Jack Welch.

But analysts and investors weren’t as happy since Jeff Immelt started calling the shots in 2001.1 Yesterday he stepped aside, and the stock had its biggest rally in over a year. Options activity also spiked to more than 10 times the daily average as traders looked for the name to go from boring to bullish. 

The first big transaction appeared a little more than an hour into the session, with a block of 18,000 30-June 29 calls bought for $0.31 and a matching number of 30-June 28 calls sold for $0.91. Here’s what it seems to mean:

  • Calls are options to purchase a security, so they can shoot up in value when a stock rallies, or become worthless if it stalls or declines. 
  • It looks like they made money in the 28 calls and rolled their capital into the 29s. They collected a net credit of $0.60 in the process. Adjusting to the higher strike keeps them in the game for further upside if the industrial giant continues to climb.
General Electric (GE), YTD chart

Source: OptionsHouse by E*TRADE

Barely 10 minutes later, another transaction strategy appeared, with 10,000 January 26 puts sold for $0.68 and 10,000 January 29 calls purchased for $1.29. This trade was especially bold because it used money from selling puts to pay for an upside bet in the calls.

They’re on the hook to buy GE for $26 if it’s below that price on expiration… that can be painful to the downside. But if it rallies, they’ll stand to enjoy some potentially nice leverage. Their net outlay of $0.61 will double if the stock climbs 4 percent to $30.22. The position will triple in value at $30.83 and quadruple at $31.44.

Below $29, it will become worthless, but the real risk is $3 lower at $26, a level eyed by chart watchers since the stock shot to long-term highs in late 2015. The stock held above it twice, bouncing at $27 early last year and again this spring.

John Flannery took the reins from Immelt. Sure he’s an experienced insider, but the main buzz on the street seems to have focused on potential changes in the sprawling company. Will there be spinoffs? Divestitures? After all, GE has its fingers in pies ranging from healthcare to jet engines and turbines. Some big investors were also pushing for the change.2 Will they look for more good news now that they’ve claimed a victory? Yesterday’s options activity suggests that’s where traders are putting their money.

 

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1. CNBC: Jeff Immelt's tenure at GE was an 'unmitigated disaster for shareholders,' analyst says. 6/12/17.

2. TheStreet: Here's How Activist Nelson Peltz Turned the Lights Out on GE CEO Jeff Immelt. 6/12/17.