General Electric Company (NYSE:GE) has had its fair share of bad headlines in 2017 and it seems that the trend is continuing in 2018. This morning we’re seeing selling pressure on the headline that the dividend that it receives from GE Capital will be cut. It seems that the financial crisis debacle effects lingers even more than a decade later. But therein lies the opportunity.
The fact that GE stock endured a slew of negative headlines in 2017 actually serves as a benefit now. Last year’s dips in GE stock established a floor against which I can trade. Investors sell headlines, but with every bounce, the floor below gets stronger as long as we don’t open a new can of worms. In this case, investors have already had their tizzy over dividend-related fears, so this dip shall pass and I want to profit from it.
My thesis is that the selling will abate soon. So, I want to bet against it getting worse from here. I sell risk against proven support to generate income and let time do the work. Should price go against me, then I would temporarily own GE stock at a discount from here. I am confident that I could successfully manage that risk should the worst happen.
How to Trade GE Stock at These Levels
I do have to recognize that earnings are coming soon and the short-term reaction to those are always binary. We don’t know what the company will say nor how investors will react. But I do know that things in 2017 got pretty ugly and the stock held $17-per-share, so I’m willing to bet against that level today.
Fundamentally, General Electric stock is not cheap in absolute terms. At a 21 price-to-earnings ratio, it is more expensive than Apple Inc. (NASDAQ:AAPL). In spite of its woes, GE stock is even priced in line among its peers say like Honeywell International Inc. (NYSE:HON). The only saving grace is that GE’s price-to-book ratio is under 3 and only one third of that of HON.
Technically, GE stock is stuck in the mud. This dip foiled a potential technically breakout that could have launched it towards $20-per-share. Now we watch for a retest of support.
The bottom line is that in 2017, General Electric stock was a falling machete. But now that the shock factor is out, it’s a regular falling knife and I am willing to cautiously catch it.
The Bet: Sell the GE Feb 9 $17.50 naked put and collect 40 cents to open. There’s an 80% theoretical chance that I would retain maximum gains with this play. But if the price falls below my strike, then I accrue losses below $17.10.
Selling naked puts carries big risk, especially for a stock as frothy as GE stock. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the GE Feb 9 $17.50/$16.50 credit put spread, where my risk is limited. Yet if the spread wins, it would deliver 15% in yield.
Ultimately, 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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