I knew General Electric (GE, $7.01, down $0.59) was in trouble when it fell below $10 a couple of weeks ago. Last week, we did a quick two-day trade in the March 7.50 puts (GEWOU, $1.05, up $0.25) where we got in at 55 cents and out at 70-72 cents. The puts are obviously at higher levels and many of you have been writing and asking about what to do.
I also mentioned GE in the Weekly Wrap Sunday night and how the near-term target was $7.50 or below. The stock closed Friday at $8.51 and lost nearly a buck on Monday and another 8% yesterday. In after-hours the stock was down to $6.81. Many of you have asked if we closed the trade out too early. Well, no and yes.
I don’t feel we closed the trade out early because when I profiled the position the put options were at 55 cents. My initial exit was 75 cents but when they got to 72 cents, I mentioned in the blog that this was close enough. We were only looking for a quick 40%-50% return. So, no I don’t feel we closed it early.
As far as additional gains, well yes, but you have to remember, these puts were not at 72 cents on Monday. They were going for 55 cents on Monday and by the end of the day they closed at 80 cents.
Having said all of that, I think GE still has some downside risk but I hate shorting this stock because its other businesses are worth so much. It’s GE’s financial arm that is killing them. I don’t even think GE knows how big the losses are. There is a report out that GE could have up to $30 billion in exposure in bad debt. I would double it to be on the safe side. That means GE could have $60 billion in debt but they said $30 billion so we will have to go with that number. Still, that’s huge. It’s like putting a band-aid on a gunshot wound. The dividend cut saved GE $9 billion but that’s not going to stop the bleeding.
All signs are pointing towards GE needing to raise even more capital to offset these losses and that is not good. The company’s CEO may have bought 50,000 GE shares on Tuesday to show his support for the stock but I don’t believe $350,000 is going to hurt his wallet. You know what I mean? Now, if GE were a $30 stock, this would be a big deal.
The interesting thing is that there was still a ton of buying in GE put options for March, April and even June.
So, I’m going out on a limb and recommend a few “all-or-nothing” trades in GE that I will try and not mention until either the options expire OR make a huge gain. Since my initial $7.50 target was wiped out in two days, GE is now giving every indication like it could go to $5. The reason I’m not going to mention them is because they will probably be volatile and they are “all-or-nothing’s”…
The March $7.50 puts (GEWOU, $1.05, up $0.25) would be worth $2.50 if GE is at $5 by 3/20/09 or sooner. That would be 150% from current levels. The April 6 puts (GEWPC, $0.85, up $0.15) would be worth $1 even if it takes until 4/19/09 for GE to fall to $5. That’s only 15% from current levels but that doesn’t paint the entire picture. Realize the April 6 put options could go to $2 quickly if GE trades to $6 or lower this week.
There are huge risks to the trades but if you really believe that GE is headed below $5 then these may work out for you. In fact, there were over 80,000 of the June 2.50 puts (GEWRS, $0.25, up $0.05) that traded hands on yesterday. That may be a little extreme but then again, there are a lot of stocks under $2 that I never thought I would see.