A Bullish Call … Sale!?

Hey Traders,

General Electric (Ticker: GE) closed at $14 on Tuesday, off .17 from the day before.

That stumble aside, the trend in GE has been almost straight up.

Since the beginning of 2021, GE has risen from $10.80 to $14.

That’s a gain of 3.20, or nearly 30%, on the year.

For a storied company like GE, one that has meant so much to the US, you love to see it.

Better still, there are lots of reasons to be bullish the stock.

The fundamentals are looking better better and the company is cleaning up its books while improving cash flows …

And on Tuesday, I saw a trade that made me think GE could run to GE.

But here’s the thing …

It was a call sale.

Yes, a customer sold 58,000 of the June 17 calls at .58. Check it out:

How in the world would a sale of 58,000 calls make me think the stock is going up?

I’m glad you asked!

Here’s the breakdown:

– There is almost no way this is just a naked call sale.

– The customer selling is almost certainly long the stock against this sale.

– In selling these calls, the customer is trying to create income against his stock position.

Let me explain No. 3 further …

These calls expire in about three months. If they go out worthless, the customer gets a yield of 4% over those three months … that’s just about 16% annually.

Furthermore, the customer could see GE run up another 20% and STILL not see his or her stock get called away.

If he or she did get called, the sale price would be 17.58 — more than 25% higher from here.

On the year, the gain would be over 55%.

That’s a nice return no matter how you slice it.

So, the customer sold the calls not because they think GE is a dog, but because they DO NOT want to sell their long stock position.

The reason for the call sale is to increase the return on the stock holding as the stock likely creeps higher.

Now, the bad news for those hoping GE goes to 40, this call sale does NOT support that argument.

But, if you think GE has a more modest upside, say to 15-16 in the next few weeks, this trade DOES support that view.

It also points toward GE seeing SOME decline in implied volatility over the next few months,  both realized (actual movement) and implied (perceived future movement).

Pre-pandemic, GE vol was around 30-35%. Right now, it stands at 48% …  there is PLENTY of room for volatility to drop

And dropping volatility usually means a stock is grinding higher.

Making Bacon?

If I were to piggyback this trade, I would be interested in some sort of long call spread.

In early January, I told traders that I liked buying the Jan 12-20 call spread for about 1.50.

That spread is now up to 2.65 (a nice 57% return in two months).

And think it’s going to keep expanding.

As IV drops, the 20 calls will see a drop in price and the 12 calls will become more stock sensitive.

So, if GE is at $16-17 a share in June, the spread will get to $4 or so.

That would be a 167% return.

At that point, I would close.

If I were opening a trade today, I would look at the June 14-18 call spread for about 1.00 as a way to piggyback our call overwriter friend.

Your Only Option,

Mark Sebastian

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