Shorting General Electric Co. With Options
Posted by Joseph Hargett in options, stocks, Strategy, technical analysis on April 26, 2011
General Electric Co. (GE) has shown strong price action in 2011, with the stock rallying more than 10% along the support of its 10-week and 20-week moving averages. However, the stock’s rally hasn’t persuaded everyone to buy, as one options trader opened a rather sizeable synthetic short position on Monday.
Weekly GE Chart With 10-Week & 20-Week Moving Averages
A synthetic short is an attempt to replicate an actual short stock position using options. The position is typically constructed by purchasing at-the-money puts and selling at-the-money calls in equal numbers at the same strike with the same expiration date. By using options, the trader gains leverage and can achieve larger returns than those seen by tying up the same amount of money in a short stock position.
Taking a look at Monday’s data from Trade-Alert.com, I found that a trader simultaneously bought 10,000 GE January 2012 22.50 puts and sold 10,000 GE January 2012 22.50 calls for a total net debit of $2.90, or $290 per pair of contracts. Breakeven for this position lies at $19.60 – a roughly 3% decline from GE’s last trade at $20.18.
Synthetic shorts are unlimited risk, limited reward strategies. Should GE shares rally, losses on the sold call could be substantial, as there is no cap to how high the stock can go. Meanwhile, profits can be impressive if GE declines, but are limited to the stock falling to zero. Below is a rough profit/loss chart:
GE January 2012 Synthetic Short Profit/Loss
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Futures Up Ahead of Bernanke Press Conference; Five Things You Need To Know This Morning
It’s Fed day on Wall Street, and investors are cautiously optimistic heading into the start of the session. Futures on the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) are trading roughly 40 points and 5 points above fair value, indicating a potentially positive start. However, a flood of mixed corporate earnings – including results from Ford Motor Co. (F), 3M Company (MMM), and Netflix Inc. (NFLX) – today’s Federal Open Market Committee (FOMC) monetary policy decision, and Fed Chair Ben Bernanke’s press conference will have a major impact on trading today.
With the opening bell less than half-an-hour away, here are five things you need to know this morning:
- The FOMC will release its monetary policy statement at 12:30 p.m. today. The Fed is not expected to sway from its current interest rate policy of between 0% and 0.25%, nor is the central bank expected to change its plans to purchase $600 billion worth of government debt. Additionally, Bernanke will hold his first-ever press conference to discuss the Fed’s policies.
- The U.S. dollar is taking a hit ahead of the Fed, with the greenback falling to a 16-month low versus the euro. Traders were hoping for more hawkish leanings from the central bank, and indications that more of the same is coming has applied pressure to the U.S. dollar. At last check, the U.S. Dollar Index was seen at 73.85, down from 74.02 in late trading on Monday.
- Shares of Netflix Inc. have plunged roughly 6% in electronic trading as traders react to the movie rental firm’s weak second-quarter guidance. First-quarter profit surged 87% on higher gross margins and falling subscriber acquisition costs. However, Netflix projected second-quarter earnings of 93 cents to $1.14 per share on revenue of $778 million to $798 million, compared to expectations for earnings of $1.19 and $763 million in revenue.
- Ford Motor Co. shares are up more than 2.5% in pre-market trading, after the company reported a 22% rise in first-quarter earnings. Excluding items, Ford said it earned 62 cents per share on sales of $33.1 billion. Analysts were expecting earnings of 50 cents per share, according to estimates compiled by Bloomberg.
- Finally, Dow component 3M Company (MMM) said that it earned $1.08 billion in the first quarter, or $1.49 per share, as revenue rose 15% to $7.31 billion. Analysts were expecting a profit of $1.42 per share on revenue of $6.84 billion. Looking ahead, 3M boosted its fiscal 2011 guidance to between $6.27 and $6.47 per share, noting that higher global sales should offset disruptions in Japan. Heading into the open, MMM shares have rallied roughly 1.8%.
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Netflix Bears On Notice Ahead Of Earnings
Posted by Joseph Hargett in Earnings, options, sentiment analysis, stocks, Strategy, technical analysis on April 21, 2011
Despite the fact that the company’s stock has surged nearly 200% during the past year, Netflix Inc. (NFLX) appears to have become a whipping post for every bear on Wall Street. Citing reasons ranging from increased competition to rising content acquisition and delivery costs, many traders believe that NFLX’s breakneck rally has to end; and sooner rather than later if short sellers like Whitney Tilson have anything to say about it.
NFLX Chart with 10- & 20-Week Trendlines
Well, Tilson and the rest may be on the edge of their seats this Monday, April 25, when Netflix steps into the earnings confessional to release its second-quarter report. Analysts are expecting the company to post a profit of $1.07 per share – an 81% improvement over the same quarter last year. Historically, NFXL has bested the consensus estimate in three of the prior four reporting periods, with an average upside surprise of nearly 11%.
To read more, including a potential pre-earnings options play, check out my new Edge Hunter post at Forbes.
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Futures Rise On Another Round of Solid Earnings; Five Things You Need To Know This Morning
Posted by Joseph Hargett in DJIA, Dollar, Earnings, Economic data, SPX, stocks on April 21, 2011
Futures on the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) are trading roughly 32 points and 6.3 points above fair value this morning, indicating a another solid start to trading on Wall Street. Earnings are back in focus this morning, with General Electric Co. (GE), McDonald’s Corp. (MCD) and Apple Inc. (AAPL) both releasing their quarterly reports. With the opening bell poised to sound in less than half an hour, here are five things you need to know this morning:
- Shares of Apple Inc. (AAPL) are trading more than 4% higher in electronic trading, after the company crushed analysts’ second-quarter earnings estimates. Remember that there was a bit of skepticism from investors and analysts heading into the report, which could now represent buying pressure for the shares.
- Elsewhere, McDonald’s Corp. (MCD) shares are down 1.15% heading into the open, after the company posted a first-quarter profit of $1.21 billion, or $1.15 per share, on revenue of $6.11 billion. Analysts were expecting earnings of $1.14 on revenue of $6 billion.
- Shares of General Electric Co. (GE) are up more than 2% in premarket activity, as traders cheer news that GE earned $3.36 billion, or 31 cents per share, in the first quarter. Revenue rose 6% to $38.45 billion. Excluding items, GE earned 33 cents per share. Wall Street was looking for earnings of 28 cents per share on revenue of $34.64 billion.
- Crude futures are headed higher this morning, while the U.S. Dollar Index has fallen to a fresh three-year low.
- Finally, weekly initial jobless claims fell by 13,000 to 403,000 in the week ended April 16, according to the Labor Department. However, the decline was just shy of economists’ expectations for a dip to 390,000 claims.
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