Surprise! I am doing a bearish trade for GE.
After today earning release, I have increased my negative bias for GE.
Considerations:
· GE was considered a triple A blue chip company. It met earnings expectations year to year with uncanny accuracies and delivered consistent dividends. It had its list of legendary CEOs like Jack Welch that gave the company reputation as an innovator of productivity, efficiency and management.
· The financial crisis last year exposed GE’s vulnerability. Without a government bailout, GE would have gone bankrupt.
· GE owes its creditors $518 billion. Its own tangible asset now is only $17 billion. It currently has a leverage ratio of 30:1. I do not think I can find any other big industrial company with this kind of leverage. This is GM in the making. Last quarter, GE produced $2 m in operating income with $17 billion and spent $4.3 billion on interest in the last quarter. Clearly, there is no way it can service its debt. Even if it qualifies as an investment grade company, GE will need to pay $41 billion in interest annually for its debt at 8% per year.
· GE earned $45 billion before interest and taxes last year. $33 billion are spent on capital expenditures and investment to keep the business running. This left $12 for interest payment. Even with government backing, there is no way this debt can be serviced.
· Feb 09, GE cuts its dividend payment which it cannot afford by 70%. Its creditors will soon wake up and demand it. Today GE is valued at $171 billion market capitalization. But the company is worth nothing.
I intend to structure a bearish trade for GE at the right time. My main problem now is that I will be fighting with a bullish market trend. I am not sure when this market will break down. It may last another 3-4 months! The way it is going, this bull run may run till the end of the year with the DOW hitting 11,000.
These are my options:
1. An ITM / 6 months Bear call of 15/14. This will give me plenty of time for the stock to drop over the next 6 months. Once it drop below 14, I will keep the full credit. There is a high probability for this trade to work.
2. A bear put with 6 months out in time except it is a debit trade
3. A ratio put backspread with at least 6 months in time. If structured at the right time, I may even get some credit for it. If GE drops anytime below the put strike price, there will be unlimited profit. If GE gaps up, the lost is hedged by the SP. Also, I have time on my side to wait for the trade to work in my direction.
4. A front month bear call and get the credit. If Short call is assigned, converted to a synthetic put and "reversed" collar. Manage the trade like a collar over longer term.
I have not decided on what kind of trades to make.
Anyone has any suggestions?
Once I make the trade, I will update the blog.
Posts
Maybe the best thing to do is wait until there is a clear direction.
ReplyDeleteMy reading of the chart:
$15 is the support. 50ma is $15.17. If $15 is broken, we have an double top formation. The target is $13.
There is another way of reading the chart:
$17 is the resistance. $15 is the support. These two levels are near upper/lower bands. IV is low now. In this case, IRON CONDOR (17,18, 15,14) seems to be fine. $0.3 for $1 spread.
Joseph,
ReplyDeleteI think the most important is the market direction. If the market turns bearish, this stock that will drop fast.
To me, fundamental rules.
If I am clear on the fundamentals, I bet longer term. I just bet with a bias based on the fundamentals. I use technical analysis only to help me in my short term entry and exit.
Having said that, I believe you can still benefit your trades which is based on technicals. But you will have to be quick to adjust if the trend suddenly change.