Stock Options Trading From Goldman Sachs

The following is from a Barrons article by STEVEN M. SEARS


SHARES OF GENERAL ELECTRIC (ticker: GE) have been a disappointment for much of the 21st century.

The stock has lost half of its value in the past five years, and it’s gone nowhere in the past three months.

But there is a way to bring back that loving feeling for a stock that was a Wall Street darling under Jack Welch’s management during the 1990s.

All you have to do is use a simple options strategy to kick-start returns by taking advantage of unusual options pricing.

Why invest in Stock options trading

GE’s options implied volatility remains elevated even though the company recently reported third-quarter earnings. Normally, implied volatility, which is the most critical component of options pricing models as it deals with how likely a stock price is to change in the future, declines after earnings.

Yet, concerns about GE’s earnings power are so widespread, especially ahead of two important December investor meetings, that the implied volatility of options that expire in three to six months are near pre-earnings levels, which makes the options a good sell.

By selling GE’s March $15 puts and March $18 calls, as Goldman Sachs’ influential derivatives strategists, John Marshall and Maria Grant, recently highlighted to clients, long-suffering GE investors can pocket a $1.17 credit, an amount equal to 7.2% of GE’s stock price, and almost four times greater than the annual dividend on the $16.16 stock.

If GE’s stock remains between $15 and $18, investors keep the $1.17, a payout that can be considered a conditional dividend.

Should the stock decline below $15, investors must buy more GE stock, but they’re getting it at a cheaper price. Should the stock rise above $18, investors must sell their stock at the higher price.

Stock options trading and selling

“We recommend selling options to enhance yield and benefit from this elevated implied volatility,” they advised clients.

Investors who do not own GE but would be willing to buy the stock at lower prices — and GE remains a play on the global economy — could sell the puts for 76 cents, collecting 5% of the $16.16.

The trade exposes investors to some event risk that could require investors to get action if the stock responds to pending management updates.

GE’s management team is scheduled to meet with investors on Dec. 7 at the GE Capital Investor Day and on Dec. 14 at the GE Annual Outlook Investor meeting. These meetings should clarify fourth-quarter financial trends, which could cause the stalled stock to break higher or lower. Still, it’s hard to imagine management saying anything that sends the stock sharply lower, or higher, which is why Goldman’s GE trade seems so compelling.

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1 Comment

  1. Kim on November 11, 2010 at 3:28 pm

    I think it is a decent trade as long as you have confidence that GE doesn’t go much above $18. a lot can happen till March, I personally would prefer just to sell puts especially considering the fact that the puts cost almost double than calls, so selling calls doesn’t increase the return that much.

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