Monday, August 29, 2011

Trade of the Day: General Electric (GE) Bull Risk Reversals

The Trade: 
A trader executed 20,000 November $18/$13 bull risk reversal trades at an $0.11 credit, or $220,000. On Friday, a trader sold 15,000 November $11 puts at $0.23 and bought 10,000 November $18 calls at $0.19, for a $155,000 credit. Another trader sold 22,500 January $11 puts at $0.39 to buy 15,000 January $19 calls at $0.23 for a credit of $532,500.The graph shown below is the November risk reversal.

The trader that executed the risk reversal today is willing to be long near the $13 level. Shares gained $0.50 or 3.22% today. Shares trade 9.65x earnings, 0.88 PEG, and 1.8x cash value. The 52-week range is a low of $14.31 and a high of $21.65. GE has dropped 21.36% in the previous month.

The white line in the daily stock chart is the strike price of the long call in the risk reversal. You can see that shares have based above $15. GE traded 216,216 option contracts compared to average daily volume of 133,780.

Alternative trade:
A different trade with similar characteristics would be a bull put vertical and call vertical. An example would be to buy the November $10 put, sell the November $13 put, buy the November $17 call, and sell the November $19 call. The trade would be done for an $0.08 debit. Unlike the risk reversal, the trader would pay a small debit, but the risk is defined. Below is the risk/reward graph of the alternative trade.

*Special thanks to Option Radar, BMO Capital, MEB Options, Bloomberg, Reuters, Optionistics, LiveVolPro, CBOE, AMEX, Option Monster, T.O.P. group, and all of the options desks and traders we work with to provide the option flow!

No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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