In the October 16 trading session, General Electric stock (GE) closed at $8.90, up 0.01% from the previous session. This performance lagged behind the S&P 500’s 0.20% decrease on the day. The Dow Jones lost 0.08%, while the Nasdaq plunged 0.30% yesterday.
General Electric stock has returned -5.1% over the past month, which shows that GE stock underperformed the US industrial industry. The industry returned -4.1% at the same time. In addition, an analysis of the options market suggests that some traders are actively betting the stock will fall in the coming weeks. So I’d like to discuss GE stock’s recent options trades and what they mean for investors.
A 4% move in General Electric stock
The implied volatility for the options, at a $9.00 strike price that expires on October 25, stands at 36.72% for General Electric stock. This number means investors expect some event that could cause modest movement in one direction or the other.
Looking at the October 25 options, I see a bid/ask for the $9.00 call option of $0.15/$0.16. I also see a bid/ask for the $9.00 put option of $0.23/$0.24. Note the options strike closest to the previous GE closing price of $9.00. You can calculate the expected price move using the mid-prices of these options:
0.235 (9.00 put) + 0.155 (9.00 call) = 0.39/9.00 = 4.3%
As you can see, the options imply that GE could rise or fall by ~4% by the October expirations from the $9.00 strike price, if we use the long straddle strategy. This assessment would place the stock in a trading range of $8.54–$9.25 by the expiration date.
Plus, the puts at the $9.00 strike price outweigh the call options by about 43%. There are 10,712 open puts versus 7,317 open calls. This imbalance suggests bearish market sentiment for General Electric stock.
Bearish options bets on GE stock
The options, which expire on October 25, saw increased put buying on Wednesday 16. According to Barchart.com, the open interest for the $9.00 puts rose by 6,126 contracts to a total of 10,712 open contracts. For the buyer of the $9.00 puts to earn a profit, the stock would need to fall to around $8.80.
Also, the open interest levels for November 22 at $10.00 puts increased significantly in the last trading session. According to Barchart.com, the open contracts rose by 8,208 contracts to about 8,529. It’s a large, bearish bet, as the open interest represents a total dollar value of about $1 million. For the buyer of the $10.00 puts to earn a profit, GE stock would need to plunge to around $8.81.
Additionally, in the October 16 trading session, the open interest for the $9.00 calls that expire on October 25 rose by 2,226 contracts to a total of 7,317 open contracts. At first glance, you could interpret these numbers as a bullish bet. However, this transaction traded near the bid price, suggesting the calls were sold.
Having said that, it’s a bearish bet. Consider that General Electric stock should stay below $8.84 to earn a profit for the options holder.
Analysts’ coverage and target prices for General Electric stock
Wall Street analysts have upgraded GE over the last six months. The consensus price target was $10.44, which represents a 17.34% upside. See Market Beat for a detailed breakdown. According to TipRanks, GE is a “hold” with an average price target of $10.60, representing a 19.10% upside.
What’s more? Among the 14 analysts covering GE, five have given it “buys,” six have given it “holds,” and three have given it “sells.”
Simply Wall St also confirms that General Electric stock is significantly overvalued in terms of future cash flow. GE’s future cash flow value is $5.36, compared to its $8.90 closing price.
Please see GE Joins Boeing in Pension Freeze, Stock Falls to learn more about General Electric stock.