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Options Edge: General Electric, Fannie Mae, Citigroup, and Fortress Investment Group

The blue-chip conglomerate garnered an early upgrade on high hopes for 2010

by Elizabeth Harrow (eharrow@sir-inc.com) 11/6/2009 9:30 AM

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Today's column includes a bullish note for General Electric Company (GE), more government aid for Fannie Mae (FNM), a spin-off from Citigroup Inc. (C), and the latest quarterly results from Fortress Investment Group LLC (FIG). Each day, Options Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.

General Electric Company

General Electric Company (GE: sentiment, chart, options) snagged an upgrade this morning, as Bernstein boosted its rating on the blue-chip conglomerate from "market perform" to "outperform." The brokerage firm also hiked its price target on GE from $18 to $19, representing a premium of 31.6% from Thursday's closing price. Most analysts maintain a more downbeat opinion of GE, with Zacks reporting nine "hold" or "sell" ratings, compared to just four "buy" or better recommendations.

GE price chart "In our view, the risk/reward balance has improved enough to warrant a more positive stance," Bernstein explained in a note accompanying today's upgrade. "We believe the risk GE Capital poses is reduced, 2010 earnings achievability is high, and there is more upside across the company into 2011."

GE is up 2.5% ahead of the open, with the stock set to rebound from support at its 20-week moving average. However, the shares have recently been stymied by their 80-day trendline -- a former source of support which has switched roles to provide technical pressure throughout this week.

Nevertheless, option traders have adopted an optimistic attitude toward GE. During the past 10 days, speculators on the International Securities Exchange (ISE) have bought to open 2.35 calls for every puts on the equity, with bullish bets more than doubling their bearish counterparts. This ratio ranks higher than 96.3% of other such readings taken during the past year, marking a near-peak of upbeat speculation.

Fannie Mae

Fannie Mae (FNM: sentiment, chart, options) is seeking additional aid from the Treasury after confessing last night to a third-quarter loss of $19.8 billion, up from $15.2 billion during the second quarter. Net revenue for the period edged up to $5.9 billion from $5.6 billion in the previous reporting period. FNM cited $22 billion in credit-related expenses for the dismal results.

"We expect to have a net worth deficit in future periods, and therefore will be required to obtain additional funding from Treasury pursuant to the senior preferred stock purchase agreement," said Fannie Mae in a statement. The mortgage lender's regulator, the Federal Housing Finance Agency, has requested an additional $15 billion from the Treasury under a senior preferred stock agreement.

FNM has backpedaled nearly 11% in electronic trading, resting heavily on potential support at the $1 level. Option players seem markedly pessimistic about the stock's prospects, judging by FNM's Schaeffer's put/call open interest ratio (SOIR). This indicator is docked at 0.85, in the 93rd annual percentile, suggesting that short-term speculators have rarely been more skeptically aligned.

Citigroup Inc.

Citigroup Inc. (C: sentiment, chart, options) said late Thursday that it plans to raise up to $100 million through an initial public offering (IPO) of its Primerica unit. The spinoff of the life insurance division is part of Citi's continuing efforts to trim down its unwieldy size in order to focus on its core banking business. The financial giant hasn't yet decided what percentage of Primerica will be up for sale, but said it hopes to sell the rest of the business as soon as possible.

C is fractionally lower in pre-market trading, as investors react to today's downbeat employment report. The stock is struggling to maintain a foothold atop support from its 20-week moving average and the $4 level.

Fortunately, a glut of put open interest at the November 4 strike could help to keep C afloat during the short term. This strike is home to peak front-month put open interest of 353,379 contracts, which could supply the shares with options-related support as expiration draws closer.

Fortress Investment Group LLC

Fortress Investment Group LLC (FIG: sentiment, chart, options) reported this morning that its third-quarter loss widened to $58.6 million, or 41 cents per share, while revenue contracted 22% to $143.7 million. Pretax distributable earnings arrived at $57 million, or 11 cents per share. The results outpaced analysts' expectations for a profit of 9 cents per share on $123 million in revenue.

FIG is off 5% ahead of the bell, pressured by a downturn in U.S. stock futures. The shares are currently pinned between newfound support at their 10-month moving average, and stubborn resistance from their 20-month trendline.

Today's early drop has the stock retreating further from the site of peak call open interest in the front-month series, which lies at the November 5 strike. This call has 7,354 contracts in residence, suggesting that some traders are harboring hopes for FIG to rebound during the short term.

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