Trading GE Stock Delivers Us a Double
On April 25, I wrote about the most hated stock in America, General Electric (NYSE: GE). Years of financial mismanagement left GE stockholders, employees and its reputation in the dumpster. At one point in recent history, the company’s share price lost 90% of its value. Its status as a stock market pariah seemed to be set in stone.
Still, we believe in redemption. And under a new, talented management team, GE is doing the right things. But because GE has a history of disappointing shareholders, we weren’t sure whether the earnings GE released this past Tuesday would come in high, low or on target.
To prepare for all outcomes, we engaged in an options trade called a strangle. This entails buying a put option and a call option at two different strike prices. The goal is to cover the total cost of the trade, and then some, by selling either the put or the call for a profit.
At the time of the strangle, GE was trading at around $9.20. Our strangle had options expiring three days after earnings with a strike price of $8.50 for the puts and $10 for the calls. Our total cost for the strangle was $0.27. That meant we would break even if the stock moved to $8.23 or $10.27. If the shares closed anywhere between those prices, we would have lost money.
GE options were showing heavy trading volume, one of the tipoffs we look for before entering a trade.
GE reported blowout earnings on Tuesday morning, and in premarket trading, the shares went as high as $10.90. If the shares opened at that level, we would have booked a 200%-plus gain. But the shares opened at lower levels, around $10.30. The shares then moved rapidly up to the $10.50 level.
We pulled the trigger and were able to sell our options for $0.55 to record a 103% gain. Because we had four days to go until expiration, the options still contained some time premium, which boosted our gains a little more!
When companies are “in the news” like GE constantly is, speculators on both sides try to influence the sentiment on the shares. One analyst maintained a $5 target on GE shares. On the flip side, GE management was confident it would be able to meet its early-stage turnaround goal, even buying shares in the company some weeks earlier.
Takeaway: In a situation like this, a strangle is the way to go. The War Room beta members were able to cash in on a double in no time! A stock like GE together with earnings season is a combination that even seasoned investors salivate over.