Traders Brace for Big Moves After GE Earnings This Week
28 April 2019 - 10:29PM
Dow Jones News
By Gunjan Banerji
Options traders are betting on an explosive move in General
Electric Co. shares after its earnings on Tuesday, a sign that
turbulence in the battered stock may not be over.
Prices of options indicate expectations for about a 9% swing in
the conglomerate's shares after first-quarter earnings are
released, according to data provider Trade Alert. That is bigger
than the average move of 4.7% that the stock posted after the past
eight earnings releases. The forecast measures the size of the
move, not the direction.
Potentially adding to GE investors' worries: Companies that have
fallen short of Wall Street expectations this earnings season have
seen their shares punished more than normal. While Boston-based
GE's stock has rallied so far in 2019, it is still down 31% over
the past year. The sharp decline has left the company's share price
at $9.57 as of Friday, making it more likely the stock could see
big percentage swings up and down.
Market participants have been buying GE put options ahead of its
earnings, according to Ling Zhou, director of equity-derivatives
strategy at Cowen Inc. Puts give the right to sell shares at a
given price, known as a strike, later in time. These types of
contracts can help investors protect against further losses in the
stock. Mr. Zhou said GE options have also been used by the
company's bondholders, who can take profits if the shares
weaken.
Calls confer the right to buy stock. Market participants often
tap options to make directional bets on stocks or hedge other parts
of their portfolios.
The options activity is a sign of how GE's stock has evolved in
recent years, from a steady dividend-paying company to one more
prone to wild gyrations.
"On a normal trading day, it's two to three times as volatile as
it used to be," Mr. Zhou said. Now, "the overall market view is
that earnings will be more volatile."
GE's market capitalization has dropped by almost $200 billion
since the end of 2016 -- to about $83 billion -- as investors have
grown worried about the company's cash flow and billions of dollars
of debt. Recently, company executives warned investors about
another year of lower profits and poor cash flow from the company's
core industrial operations. Last year, the company's stock was
dropped from the Dow Jones Industrial Average after having a place
on the blue-chip index for more than a century, while its bonds
were downgraded by ratings firms.
To be sure, some options traders appeared to be wagering on a
dramatic rebound in the shares. One of the biggest options
positions outstanding would profit if the stock reaches $20 by
January.
Meanwhile, a popular contract that traded on Thursday would pay
out if GE shares climb to $20 by 2021, according to Trade Alert.
Such a jump would mean a rally of at least 100% from the stock's
price on Friday and bring the shares back to a level they were at
in late 2017.
Analysts are closely watching for clues on what GE will do with
its health-care business. GE has said it would sell assets to raise
cash and recently agreed to sell its biotechnology business for $21
billion. The shares rallied 6.4% on news of the biotechnology sale,
though they've fallen since then.
"There's still a bull case where you can see this as a $20 stock
in 2020," said Deane Dray, an analyst at RBC Capital Markets. Mr.
Dray has an outperform rating and a price target of $13 on the
shares.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
April 28, 2019 08:14 ET (12:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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