New Trade Alert for (GE)
General Electric June $28 Call @$3.75 or less
Risk Rating: 2.5 (1 = lowest 5 = highest)
Above Break Even Probability: 54%
Max Loss Probability: 14%
Blue Chips boomed to ALL TIME RECORDS in last month with August 15th marking the tip top in the DOW. Sideways trade has seen a slide in the last few weeks with the industrial index still up more than 5% in 2016.
A handful of DOW stocks have not participated in the rally run with General Electric stuck at unchanged year to date.
GE had tracked in a ten month range from $28 to $32 with and an even narrower path in August between $31 and $32.
Something has to give as this consolidation looks for a new catalyst to catch up to the DOW.
An upside breakout targets $33 and new highs then $36. For perspective GE had been in the $40’s in 2007.
A weekly close below $28 would void the bullish bias.
The Options Way: Unlimited Upside Potential with Limited Risk.
A GE long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move. There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With GE trading at $31.10, for example, an In The Money $28.00 strike option currently has $3.10 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the GE June $28.00 Call at $3.75 or less.
This option strike gives you the right to buy the shares at $28.00 with absolutely limited risk.
The June option has nearly ten months for BULLISH development. An 81 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $375 or less paid per option contract with a stop loss exit at half of the cost to reduce dollar exposure. The upside is unlimited.
The GE option trade break-even is $31.75 at expiration ($28.00 strike plus $3.75 or less option premium). That is just 75 cents above the current GE price.
A rally to the $36 measured move breakout target is more than 15% higher. At that level the option investment would gain 100% to $8.00.