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General Electric Co $GE | War Room Strategy Session

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

 War Room Strategy Session

As I always say, you pick the battles, I show you how to fight them. The next stock up based upon your voting is General Electric Co (Ticker: GE). Last week’s strategy on Peabody Energy I called for a pullback and if you took the short puts at the 33 strike when it hit the 35.26 target, you could have got an average fill price of 2.55. This trade would have been executed on Friday, and at open today, would be profitable at roughly 2.05. Not bad to have a 50 cent return in 1 day.

Also, the butterfly spread could have been bought at close for 2.60, now trading for 3.28 today (+26%). Also a nice and generous return. Can you expect these returns going forward, no. You can expect I will try my best to bring forth more strategies like this going forward. Well, enough about last week, let’s focus on this week.

Overview of the Company

General Electric Co has the following description available at Yahoo! Finance:

General Electric Company (GE) operates as a technology, media, and financial services company worldwide. Its Energy Infrastructure segment produces gas, steam, and aeroderivative turbines; generators; and combined cycle systems, as well as provides water treatment services and equipment. This segment also sells surface and subsea drilling and production systems, floating production platform equipment, compressors, turbines, turboexpanders, and high pressure reactors to national, international, and independent oil and gas companies; and offers equipment overhauls and upgrades, pipeline inspection and integrity services, remote diagnostic and monitoring, and contractual service agreements. The company’s Technology Infrastructure segment manufactures jet engines, aerospace systems and equipment, and its replacement parts, as well as provides repair and maintenance services for commercial aircraft; military aircraft, includ ing fighters, bombers, tankers, and helicopters; marine applications; and executive and regional aircraft. This segment also produces healthcare products, including diagnostic imaging systems; offers transportation products and maintenance services; provides enterprise solutions using sensors for temperature, pressure, moisture, gas and flow rate, as well as non-destructive testing inspection equipment. GE’s NBC Universal segment engages in the production and distribution of films and television programs; operation of television stations and cable/satellite television networks, as well as theme parks. The company’s Capital Finance segment offers loans, leases, and other financial services to customers, including manufacturers, distributors, and end-users of equipment and major capital assets. Its Consumer & Industrial segment produces various house hold appliances, lighting products, and electrical equipment and control products, as well as provides related services. The company was founded in 1892 and is based in Fairfield, Connecticut.

Source: Yahoo! Finance

GE Logo

Technical Analysis of $GE

The chart tells us more things than words can simply quantify. That’s what I love about the technical analysis portion of these strategies. It is important to find key price points which could tell us shifts in demand for the shares in the company. This works very efficiently for complex companies and conglomerates such as GE, which have far to many business segments to accurately formulate a “value” for the business. Let’s look at the weekly chart first.

GE Weekly Chart

I think the furthest downside risk in this stock will be an even 10.00 per share. I take this number not out of thin are just out of rounding down from the lower bollinger band. What I want to note is that the MACD is in a strong uptrend, the overall trend of the price is up, and the RSI is showing new signs of strength. I think we can all agree the price points we saw in March were irrational pricing of investors and traders panicking about market fall out. This likely was exacerbated even more as to the complexity of GE’s business model and the effects pondered upon with the threat of financial fallout.

With the business stabilizing, I would not be surprised to see a dividend increase at some point as well. My biggest fear is a break of this trend line as the CCI is weakening and could indicate a strong sell signal.

Price Targets

Downside:

  1. Most probable: 15.00 trend line support on weekly chart.
  2. Probable: 14.50 from the support and resistance battles from August/September.
  3. Probable: 13.90 gap yet to be filled
  4. Furthest probable: 13.58 is the 20 week moving average. Far away from probably target of 14.50 as a direct result to adjust for the probability that a down move will trigger some irrational selling quickly.
  5. Improbable but possible: 13.16 is 50 week moving average. This I feel is the approximate fair value of the company and a price point worth buying at.

Upside:

  1. Most probable: 15.95 is a gap from last week that should most likely be filled tomorrow.
  2. Probable: 16.50 is a psychological round number resistance point, GE tends to move in 50 cent price moves.
  3. Furthest probable: 17.09 is the previous failed rally’s resistance point
  4. Improbable but possible: 17.50 is the peak of this year’s rally from March to the middle of September.

Well now we have our price targets, let’s analyze it with some strategy!

We Are Bullish Long Run, Now What?

For me, General Electric is not necessarily a stock you want to short, ever. It is too difficult to price and I’d rather be bearish on a stock I can A) price more accurately and B) get a larger price move out of. Too many investors are willing to buy up GE shares when things start to fall that I would fear a far enough move down to offset the risk involved with an up move. However, if you want to get short I will present to you a good strategy to use.

Bullish Option

The first obvious choice is to buy the shares outright. However, I never like to do that only and want something to offset some risk. My idea would be to buy GE and sell some call options against it to lower our average cost. I really don’t want to be long GE for price movement, I want to be in it to capture option premium with the business model to back up the risk behind the trade.

I think that I should be able to get out of the trade at a profit eventually if things go south on me. I would sell the slightly out of the money, 16 strike November calls against each 100 shares I have in GE. I will then bring in a premium of roughly 0.89 per share, instantly lowering my average price to 15.87 – 0.89, or 14.98 per share. Our maximum profit for this trade, over the 45 day period, will be 16.00 (the strike) minus the purchase price of 15.87, plus the premium we collect of 0.89 per share (option write). This equates to a total of $1.02 maximum profit per share. So no matter what price over 16 that GE could close at, we still make 1.02 profit. Then, if GE closes above 14.98, we still at LEAST break even. This is important! I am not a great stock picker, but by stacking the odds in our favor like this, I think we make a good trade and make money in the long run.

Bearish Option

Now, if you want to get bearish, here is what you do. You are going to want to put risk:reward in your favor. Calendar spreads are a great way to do this. You can buy calendar spreads at price points below GE, where you think its fairly valued. There are millions of people smarter than me, and I think that those people, if they feel like they can accurately price GE, should take this approach. Let’s say figuratively you think GE is worth 13 bucks per share, buy the 13 calendar put spread for Nov/Dec.

You can buy this spread for roughly 13 cents per spread, $13. Now if GE were to close @ 13 at November expiration, the spread will have the November put option expire worthless, and the December put option now be owned free and clear. The value of this option I would project and estimate to be valued at roughly 0.90 to 1.00 per share at that point, yielding a return of 600-700% return. Now if it expires at roughly 15 per share on expiration, not moving as far as we thought it would, then it would likely be trading for approximately 0.15 per share, or still at a slight gain (less commissions).

So if you are right, you have a chance to make a large profit, if you are wrong, you may have a chance to still roughly break even. Now if GE skyrockets to over 20 per share, you would likely have a trade that loses 100%. You could close it once it starts to move against you for possibly 0.05, but I’d rather hold and pray at that point unless I had a large % of my portfolio in my trade.

Conclusion

Looking back at this strategy, we really have two options. We can either get long with a written (sold) call option against our position as a hedge, or, we could get bearish and long some 13 strike put spreads for November/December. It’s all on you but there is two solid strategies for both sides of the market here that I presented. You could also put a spread like the one presented if you were long GE with the covered call strategy, by “investing” 0.13 of the 0.89 premium into the 13 strike calendar put spread strategy. Then you have a lot more potential to break even and make a bad trade good (if GE falls unexpectedly a large amount). This is just my thoughts, you have to do your own DD (due diligence). Contact a professional if you want to trade GE.

Good luck and happy trading!

Disclosure: I have no positions in GE.