Last Friday I got an email from Stephanie Link, co-portfolio mnanager of Action Alerts Plus, asking "What is up with General Electric(GE)? I am hearing a big option trade and volume spike in the stock." After doing a little digging I found out that a major trader had traded a 'buy-write' in the stock. A buy-write is when a trader buys a stock and sells an upside or at the money call at the same time.
A buy-write is generally considered to buy a mildly bullish trade. The trader doesn't thing the stock is going to go down, or is going to slowly rally to the strike price sold. In this case, the trader was thinking GE was going to run to close to 21.00 a share. Now, one of the problems with being GE is that when the market drops, so does GE. It is one of the most correlated stocks to the S&P 500 because the company encompasses about everything: industrial, finance, consumer...you name it.
Let's review the T3/OP video with Jill and Scott for more on the fundamentals and technicals on GE:
While the market has sold off some, and truthfully I think might test 1350, I think that GE is going to follow the path that Alcoa(AA) set on Tuesday. It is going to be a positive earnings surprise and get a nice pop higher. Earnings are on Friday April 20th, not exactly the easiest day to play earnings. The good news is that I don't think anyone is expecting this stock to blow things out of the water. I think a small bullish play makes a ton of sense.
To make matters better, we have gotten a nice IV pop. While our buy-writer at the top may have gotten beat so far, I think he is probably write, GE is heading for a nice slow rally. With the aforementioned vol pop I think a may put spread makes a lot of sense. Lets sell a GE May 18/19 put spread and collect about $0.33. It's a pretty simple, easy and should be a nice winner in short order after earnings. We will buy it back for $0.10.
Trades: Sell to open GE May 19 puts at $0.56 and buy to open GE May 18 puts for $0.33.