Leverage Obama's First 100 Days with Covered Calls on GE

Here’s an idea to play a blue chip stock leveraged by two Obama initiatives likely to be pitched during his first 100 days in office. Buy 100 shares of General Electric (GE) at around $15.50 and sell a March $17.50 covered call at $1.50. By selling the covered call at $2 above the current stock price, it’s really like entering a long position on GE at only $14.

Here’s the added sweetener – General Electric’s quarterly dividend payments traditionally go ex-div in December and February. The likely pay-out will be $.31/share. By holding the shares through the 3rd Friday of March, you will meet the requirements to receive these two dividend payments. This lowers your net entry point to $13.38 per share. Until the last few weeks, GE hasn’t even been below $20 since the late 90’s.

Maximum Upside = $412.

Here’s the math….
With the decent chance that GE winds up above $17.50 by the 3rd Friday of March, your covered call option contract will get exercised and your shares sold for $17.50 each. You also get to keep the $150 premium received when you sold the covered call. You also receive the two $31 quarterly dividend payments.

$1,750 (100 shares sold at $17.50) + $150 (covered call option premium) + $62 (two quarterly dividend payments) - $1,550 (initial investment) = $412 or ~ 26% profit in only 17 weeks time.

Reasons to be Bullish on GE
New presidents typically propose many initiatives during their first 100 days in office. Barack Obama will be no different. It’s not a stretch to think that two on his list will be green energy and healthcare infrastructure. Two of General Electric’s businesses just happen to be wind energy equipment (those tall wind turbines you see in T. Boone’s commercials) and high-tech medical equipment (CT Scans, MRI Machines, Surgical Lighting, etc.) GE is certainly an established player in these industries that stand to get a boost from the new president's agenda.

Potential Downside
There is always a potential downside to consider. Your net entry under this scenario though is only $13.38 – 14% below where it currently trades around $15.50.

Comments

[jeandit75:]

I am sorry but the real downside on GE is $0 and one would have to be foolish not to realize it.

2008 Nov 26 09:13 AM

[Ryan Yamada:]

Agree with author. Implied volatility premiums mean that covered calls are a great way of making cash. Still need to protect yourself in case Immelt decides GE can't guarantee the dividend through 2009.

2008 Nov 26 09:20 AM

[JBG:]

I like the idea of the covered calls. But why not do them month to month instead of just March?

2008 Nov 26 10:34 AM

[Rayn:]

You could wind up stuck with those GE stocks for a long time.

2008 Nov 26 11:29 AM

[sumosama:]

to capture the dividends I think.


On Nov 26 10:34 AM JBG wrote:

> I like the idea of the covered calls. But why not do them month to
> month instead of just March?

2008 Nov 26 02:28 PM

[drone:]

The problem with writing covered calls is that you first have to buy the stock. With a company like GE and its sleazy management, that can be deadly. Look for better quality companies. Sell some puts on those companies when the market is down. If you're exercised then sell some calls. Play it both ways. Keep an eye on the VIX to guide your decisions.

2008 Nov 27 01:04 PM

[drone:]

He's talking about 100 shares and one option contract. Given that, the spread on the options and transaction costs are gonna kill you on this small trade. Maybe that's why he wants to stretch it out until March.


On Nov 26 10:34 AM JBG wrote:

> I like the idea of the covered calls. But why not do them month to
> month instead of just March?

2008 Nov 27 01:17 PM

[drone:]

About eleven billion shares outstanding with a thirty-one cent dividend, and that's only the common. Where are those billions going to come from? So they issue shares instead, which dilutes you around 2% every quarter. Theyr'e gonna have to sell a shitload of wind turbines and jet engines to cover that because their financial arm isn't pulling its weight these days.

2008 Nov 27 01:29 PM

[drone:]

Maybe GE should buy Monsanto and start selling genetically modified grass seeds to golf courses in developing countries. My point is, this company is in serious trouble and there is no way out.

2008 Nov 27 01:52 PM

[drone:]

I worked at a Home Depot recently, where we carried GE home water purifiers. In the seven months I was there I think I sold 1 filter kit and one home water system for a total of about $200. That doesn't say much for GE's water business. It doesn't say much for Home Depot's business either.

2008 Nov 27 01:59 PM

[drone:]

The latest news from GE is that they have made some key new appointments. These people are all at the vice president level so you know what kind of pay that involves. Their areas of expertise are in such things as supply chain, whatever that means. In the past every time GE made an announcement the stock went down and this latest news won't be any different. If you're a GE shareholder, dump this dog, three more VP's getting paid out of your wallet can't be good.

2008 Nov 27 02:47 PM

[toomuchgas:]

The GE finance division is a black box. Why does GE need TARP funding and equity from Buffett? Stay away from finance.

2008 Nov 27 04:51 PM

[PeteK:]

GE maybe the biggest company on earth,
but it can also be the biggest time bomb.
Won't touch it now. Same with Boeing, looks
like its walking the same path as GM did.

2008 Nov 28 08:47 AM

[Fred Thomson:]

GE is a great price right now - P/E at around 5 - this is an iconic company if I've ever seen one.

Mar 01 04:57 PM

[jeandit75:]

what a great call Glenn! Short GE.

Mar 15 09:29 AM