GE - a decision on my trade!

Finally, I cannot resist on adding a bearish trade on GE. I know it is stupid or even crazy to go against a bullish trend or to be so bearish on GE.

As I said, I do not like the fundamentals at all. Although the company has many good profitable divisions, the $518 billion debt is going to be a heavy burden on the stock. The most probable scenario over longer term is that they have to sell their profitable divisions to pay the debt of the financial group.

I decided to put is an order for a ratio back spread


BTO 20 contracts March ’10 14 put for 0.73
STO 10 contracts March ’10 16 put for 1.54

New Credit received : 0.08

Risk

Bull Put Risk = 2 – ( 1.54-0.73) = 1.19
Long Put Risk = 0.73

Total put ratio risk = .73+1.19 = 1.92

Reward

Upside : 0.08

Downside : 14 – 1.19 = 12.81 ( This is assuming GE goes to zero! )

Potential reward if the stock goes down is HIGH

Lower BE = strike of LP ( or protective put ) – Risk of entire trade
= 14 – 1.92 = 12.08

Upper BE = Strike of Short put – Net credit of entire trade
= 16 – 0.08 = 15.92

PE: Wait for stock to drop at >20% to profit. If the stock goes up, collect the credit and let the trade expire

SE:

This is a patient, stupid or even crazy trade! I do not plan to do a lot of adjustment. I just wait it out for GE to trend in my directions. If GE drops below 12.08 in the next 6 months, I will make a lot of money from my long put. It has a bearish bias but if the stock moves up, I do not lose money. The stock needs to drop through 2 supports. In a bearish environment, this is possible.

If GE continues to trend up, I will still collect a small credit of $80.

If GE stays between $12-16 – I will lose some money. During this stagnant period, I may decide to sell some put to reduce the cost basis of this trade. Nevertheless, I expect GE to gap up at least 20% up or down at any time during the next 6 months.

I am not fully comfortable with the trade as I am very biased in my bearish direction. But, I was proven right in the past when I take such long term positions. I was very bearish on GM and bullish on GLD before. Both trades worked in my favour over time.

I am only placing a small position to see how it goes. The maximum risk at 50% is probably around $300 loss. In the meantime, when the trend becomes clearer, I may add some other trades like ITM bear call further out in time

Will keep the blog readers informed on the subsequent results and any adjustments.