Here's an example of waiting patiently for a short-term income trade to occur. I wrote an article on GE back in August stating that the company looked better than its numbers. At that point the stock was moving up, but I suggested a short-term income play contrary to the trend of the stock. I usually don't do this; I usually go with the trend.
The Options Play
GE is presently trading at 21.10, looks bullish in nature, but moves very slowly. My income strategy at this point will be contrarian because I believe we will see a pullback before it continues up. Since we are close to "21," I am looking at a bear put spread short term. Long term the business is a good investment and they are making wise choices. But for an income play we look shorter term.
- Buy a January 2013 put with a strike of '21' (priced at $1.38)
- Sell a January 2013 put with a strike of '20' (priced at $0.95)
- Net Debit to Start: $0.43
- Maximum Profit: $0.57
- Maximum Risk: net debit
- Maximum Length of Trade: 5 months
Reasoning behind the trade
- Bullish pattern moves up and down and we are looking at catching the pullback
- At the top of the Bollinger Bands presently, its pattern does move back.
- January 2013 gives up room for time decay since the stock moves slowly.
- Sell the January 2013 '21' strike: $1.47
- Buy the January 2013 '20' strike: $0.87
- Gross Profit: $0.60
- Net Profit: (Gross Profit $0.60 - Net Debit $0.43)= $0.17
ROI: 36%
The length of time decay on the options was important here. It continued up until it reversed direction in mid October. The extended life of the option I bought in August allowed me to gain the time I needed for this play.
General Electric and the Influence of the Fiscal Cliff
It is unlikely that the U.S. will head down a depressive path with the "fiscal cliff" fiasco it is dealing with, but it is also unlikely that the whole thing will be dealt with by the end of the year. At least this is the opinion of Keith Sherrin, CFO at GE. He says:
"There has got to be a little more time to work on the full grand bargain, I don't think they could possibly resolve all of that by the end of the year. Could there be some kind of agreement that gets at some of these issues and then a further timetable to resolve them completely? That's highly likely."
He believes raising revenue and cutting long term spending will be the solution the law makers come up with. Since this is the problem that has been influencing the markets lately I believe any move toward solving the dilemma will be positive on the markets. There is a good possibility that some positive things will be set in place before Christmas and the markets may turn up.
Investing in General Electric
Citigroup reiterated its Buy rating on General Electric Company, but slightly lowered its price target from $25.00 to $24.00. I tend to agree with Citigroup's analysis even though the stock is in a bearish pattern. As a global conglomerate, GE will follow the markets and I am expecting the U.S. markets to turn bullish - possibly as early as mid December otnce he fiscal cliff problem is solved. It looks like it has found good support right now, but it could drop to 19.25 before it finds support again. I expect the stock to turn and find some legs in a move up. I would not be surprised if the stock picked up (15% to 20%) in value over the next 6 months.
(click to enlarge)
Technically Speaking
General Electric has been in a very strong bearish trend for the last 30 days after it peaked in October forming a small double top. A reversal pattern was not unexpected as the RSI indicator was signaling an overbought position for quite some time. The strength of the present move can be seen in the Bollinger Bands. Notice how the stock has used the middle band as resistance? This indicates a very strong move down. The MACD and the RSI both support this strong move down in bearish territory, but each indicator is also signaling a possible slowdown in the strength of the move. While the RSI just touched oversold territory, the MACD looks like it is also flattening out. This could indicate a short reprieve as the stock moves sideways toward the middle band again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
