While the market continues to struggle here, I'm impressed by General Electric (GE). This one stopped being a leader a few years back, but is still a notable name. I am a bit surprised to see it strong relative to the market, though. After the strong October run, we've witnessed some consolidation and this one may be setting up for a continued push higher here.
I'm drawn to several components of this setup. I really like the clear stop level. If we see a close under the $30 level on consecutive days or even a close under the 10-day simple moving average (SMA), I would shift back to a neutral stance, but for now, the price action is bullish. We've had a strong run higher and, after a small consolidation dip, look to be ready to push higher. The short-term push should get us near $31.60 before the end of the year. There is the potential for a big push here as both the price and the MACD have been consolidating and coiling. The flip side to this is that a price failure here could result in a sharper downside move to the $28.50 area. Keep an eye peeled on the Relative Strength Index (RSI) as a push under the lows since Oct. 5 there would be a big yellow flag.
Source: StockCharts.com
I think there are several approaches to this one from an options perspective, based on the type of trading you find most comfortable. The short-term speculative player would likely benefit from just running a long play on Jan. 15, 2016, $30 calls for around $1.40. Note that GE will be paying a dividend in December, so one must factor that into the analysis. A push to $31.60, adjusted for the dividend, would be more like $31.40. The idea here, though, is a trader has a few weeks to see if a move develops and they could exit the position without significant time decay.
A longer-term approach with a defined risk would be the January 2017 $30 call at $2.45. I do like this approach in that a trader has 14 months on the position. Adjusting for the dividend, the stock would have to move around 10% to see the intrinsic value equal the cost of the call, but should GE squeeze higher in the upcoming months (think three or less), a holder will see a solid participation in the rally under a defined risk parameter of $2.45.
My preferred play here is a covered call position consisting of long stock and short the January 2017 $32 call at $1.45 or greater. I would target $1.50 on the sale. Combine the premium of the call with the anticipated dividend total of $1.15 between now and January 2017, and the yield on the stock will be 8.5%. If GE should get to $32 or greater, the maximum take home would be 13%. Of course, there is more downside to this play, so I would look at a collar should GE fall under $29.50 or simple stop out of the position on a close under $28.75. Should the stock run higher, I would consider taking the early exit or possibly adjusting my position. I don't want to make things complex, so I would probably just take whatever profit I held should we approach the $33 area. One thing I would note is if we see a big run in the stock, the chances of shares being called away early, especially right before going ex-dividend due, increase.
There are certainly plenty of new-school ways to look at an old-school name, but I'd stick with the basics here. I want to see a close over $30 for the next two days, though, before I commit to opening a position, but this one is high on my radar.
At the time of publication, Collins had no positions in the stocks mentioned.