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Last GE Investment Yielded 35% Annualized: Here is Our Next Move

|Includes:General Electric Company (GE), SPY, SPY

 General Electric Investment Continuation

Congratulations to those of you who entered the War Room Strategy Session for GE trade on October 5th of this year. We were eyeing for GE to hover around 16. We entered the trade at 15.83 and sold short the November 16 strike call for $0.89 per share. With it expiring worthless because of GE closing at $15.59 on option expiration (Source) we can now look back at a successful trade. This net’s a profit of $0.65 per share, or 4.34% over the 45 day period. Doesn’t sound like big money, but annualized that is a 35.2% return. Now that is sexy! The good news is, we still own the shares and we can write another call option against the stock.

Currently, GE is trading at $16.17 and I think we need to look into writing another covered call option. This time I am eyeing the $17.50 strike. The market seems to be digesting most news well right now and we are flirting with highs. Let’s ride it up again.

Going Forward

In order to do this and make it worth our time, I am looking a little further out again in time. In October before the October expiration, we wrote call options against our position expiration in November. As previously stated, it was 45 days later. Well, now I have an upside bias going into Q1 of 2010 for GE, and I am looking to write the $17.50 Jan-2010 calls up. I don’t think we will see much more movement pass the $17.50 price so this is upside potential I am willing to risk missing out on for the extra $0.30 per share.

The option is currently trading at a $0.28 bid, so I would like to sell these ones for tomorrow’s trading day at a limit of $0.30. They expire in 45 days. If we do not get the $0.30 fill then I will take any fill at the bid by market close.

If we get the $0.30, I highly suspect we could rise up to $17.50 going into January expiration, but more likely we will see $17.00 to $17.25 per share at that point in time. I don’t see GE closing above $17.50 before then but it could move above it before expiration. At that point we may entertain rolling over some options to lock in intrinsic value (lock in $!).

Trade Idea Broken Down

So what we are looking for is as follows:

  1. Our current position that we opened on October 5th gained $0.34 per share.
  2. The call option we sold in October closed out a profit of $0.89 per share ($1.23 per share accumulated).
  3. Current net profit of $1.23 per share with initial $14.98 risk exposure yields us a net return so far of 8.21%.
  4. By holding this position through January expiration we will also be able to acquire the next dividend payment as well. If GE does not cut or raise the dividend (I suspect a possible increase to $0.12 per quarter, or 20% growth), we will also get the $0.10 per share that has been established from the last cut. Many companies are raising their dividends back and I think they may as well, or prelude to increasing in next quarter if things go well. This will also help boost the value of the stock!
  5. Now sell the $17.50 strike call in Jan-10 for $0.30 to bring in another $0.30 per share. With this move our risk will now have to be readjusted. We now will have exposure to loss of $15.77 per share ($16.17-$0.10-$0.30). This will be the break even point from our new trade.
  6. The new break even point on our overall trade is being lowered from $14.98, to $14.58 per share now.

Strategically Thinking

I hope you are picking up on what we are doing here. I truly want to teach you how to become an investing machine! If you buy the stock, hold it for dividends, and sell options against it at “fair values” for what you think the stock is worth, in the end you should end up on top. The stock went flat for the first 45 day period and we still made an annualized rate of 35%+!!! Most bull markets barely yield that. We hope to make this return in up, down, or flat markets. Now, if the dividend is raised, now the yield is going to increase on the current price per share. However, there is also the compounding effect.

We initially purchased the stock at 15.87. This makes the dividend payment to come out to 2.52% annually. This is much better than money market returns or short term T-Bill rates. However, if GE were to raise the dividend to $0.12 per quarter, or $0.48 annually, we now are making 3.02% annually on the dividend alone (based off of the original purchase price). The yield may be only a smaller increase based on the current price per share, but it is exponentially better growth from our original purchase price. This is what dividend investing is about!

Well, good luck to all and happy trading/investing with this position. On a side note though, please read the P.S. I have posted. It has to do with a charity that means a lot to me, and to a lot of kids and their families!

P.S. – Why I Feel Guilty This Christmas

All semester long I have been unable to trade to focus on school I can graduate (in 11 days!) so my income levels are well lower than normally. I’ve been living on my savings and am almost out. Luckily my family has helped me out a lot so I am fine (Thanks mom and dad!)

St. Judes Hospital

I am not looking for money, but for a favor to donate to a charity to make up for my lack of capacity to donate enough this yearI figured if I am not going to be able to donate enough money, that I should at least promote my favorite charity to my dearest readers.

I am not going to be able to donate money as much money to St. Jude’s Children Hospital this year so I challenge you to invest some of your profits from my posts into this great cause. Their website is Most of you have probably heard of them, but if you haven’t, they are in the business of finding cures for children’s cancer and diseases. Help support the kids this holiday season with a charitable donation.

If you cannot afford to donate, at least take a few minutes out of your time to write the kids a Holiday card to show them that people out there care. I recently had a family member pass away at an older age of cancer and he was very close to me. Not only was my grandpa my grandfather, but living 5 doors down from me he became a best friend. Seeing him at 79 go through what he went through was terrible: I couldn’t even imagine seeing my own child go through it. Thanks so much for your consideration. I am sure good deeds do not ever go unnoticed!

Happy holidays to all, and to all a good night! =D

Disclosure: No Positions in Any Stocks

Stocks: GE, SPY, SPY