GE Drops a Bomb, But Options Traders Are Cautiously Optimistic

There’s no mistaking today’s driving news, as the big earnings miss from industrial and financial conglomerate General Electric (GE) sent shares reeling 10% to $32.78. (See transcript.)

The shortfall was blamed on a dramatic end-of-quarter mess in the financial area, proving that the subprime mess has indeed spilled over onto balance sheets of other companies.

While the knee-jerk reaction from equity sellers was an obvious tailwind to the earnings story, options activity was more refreshing. In the April contract, call buyers appeared to be in ascendancy at strikes between 32-34, with premiums at the lower strike commanding $1.00 in early trade implying an at expiration break even share price of $33.00.

In other signs of a rebound later in the year, investors appeared to sell put options expiring in September at the 30.0 strike at 1.35 in exchange for call buying at the 35.0 strike for around 1.30. This is a bullish play although clearly risky in the event of further share price weakness. The trade nets a nickel credit and offers late summer exposure above $35.05 to keen buyers today.

Option implied volatility rose around 7% to stand at 29.4% as option traders put 404,000 contracts into play in the first 45 minutes of trading.

Comments

[wooD:]

It's not wonder the option traders are optimistic, they say this is the biggest drop since 10/19/1987, but if you look at this chart (finance.yahoo.com/q/ta...) it doesn't even register. Big chips and gold/silver (already overpriced) are the things to hold during uncertain times.

2008 Apr 11 04:36 PM

[stockmarket...:]

The market has been strangely immune to bad news that shows the economy is worsening. Are mysterious forces at work, or do the mass of investors feel the economy will turn around by year-end? Today may mark a turning point where rational thought results in substantially lower prices for equities.

2008 Apr 12 12:06 AM

[goatfarmer:]

A month or two ago, such news would have driven the Dow down 200 or 300 points. Friday's fall was modest by comparison. I wonder why?

2008 Apr 12 01:49 AM

[Briggsy:]

goatfarmer, the DJIA was down 256 on friday.

Bob G., I agree that the recent market buoyancy has been in denial of the inevitable deterioration in fundamentals. That buoyancy was still evident at the end of the session Friday, despite the long drop throughout the day. The air above the 50-day MA will continue to be preferable, until it's sell-in-May-and-go-awa... time.

2008 Apr 12 08:29 AM

[gordon:]

Those of you catching a falling hatchet: how's that been working lately? Too young to remember 2001? GE chart says it's going to $30, ignore this if you want. Not short. chart>
stockcharts.com/h-sc/u...

2008 Apr 12 12:52 PM

[gordon:]

Sorry, here's the link tinyurl.com/4tjl8f

2008 Apr 12 12:53 PM

[gordon:]

Forgot to say, see RSI at the top, it's not even under 30 yet, not even fully oversold, meaning
this goes lower. tinyurl.com/4tjl8f

2008 Apr 12 12:55 PM

[Chris Marshall:]

I think that most Wall Street Analysts have been in denial over the macro-economic outlook for months, out of 16 GE analysts, 10 were BUY, 3 Overweight and 3 Neutral.

Is it surprising that investors went into shock?

I don't know how the options boys are viewing GE, but Commercial Real Estate prices tend to lag Residential by about 18 months, if this still holds true, you can expect 6 Quarters of write downs from the GE Commercial Division. With Industrial, Money and Medical also performing poorly, all that is left is Broadcasting and Infrastructure.

Broadcasting ( as a percentage is irrelevant), but Infrastructure bears further investigation.

Many Infrastructure projects require huge amounts of capital, signing a "memorandum of understanding" for a project, does not necessarily mean that it will progress, as funding may be withdrawn.

Additionally, I would like to know if the Aero Engine division books all of its "options" on the order backlog, as these options tend to disappear rapidly when 1) fuel prices are high 2) When airlines are going bankrupt 3) When financing is hard to come by

All three of these difficulties are present, so the infrastructure division may be affected over the coming months.

I feel that a price of $28 dollars per share is more realistic, until the economic outlook improves.

I did point out that GE was over priced (prior to the announcement),
and as I hold no stock in GE, I have no axe to grind, or any Bank bosses to keep happy.

2008 Apr 12 12:56 PM

[Serge Birbrair:]

I like GE at the current levels as a pure dividend play. At current levels it pays 150 points over the money market. At some income from call writing and I think investors will weather the storm.
I am long GE - short April 32 calls.

2008 Apr 12 02:54 PM

[johnthebear:]

chrism1962..."Commerci... Real Estate prices tend to lag Residential by about 18 months, if this still holds true, you can expect 6 Quarters of write downs from the GE Commercial Division."

Please explain the commercial division exposure. Is it CMBS or direct real estate investments"

Also, is the first of 6 quarter reports to expect losses?

2008 Apr 12 06:28 PM

[stockmarket...:]

Sharesunited, the seasonal pattern of market strength has been certainly turned on its head that past 5 months. The May through October period should be interesting.

2008 Apr 13 09:08 AM

[Chris Marshall:]

To John the Bear:

The Commercial Division will suffer with its own direct real estate as well CMBS. It's own real estate assets, are small by comparison to the securities, but are still relevant. I cannot comment on their full exposure to CRE, but if we use the residential RE analogy, you can expect progressive write downs over the next 6 quarters. With the GE balance sheet, I expect the Execs, to write off, what they think is acceptable to the markets, rather than the real figure.

I think that they will have to do this, or look for another CEO.

2008 Apr 15 05:49 AM