As General Electric Company (GE) prepares to deliver earnings tomorrow, call options are flying off the shelves
As earnings season continues, Dow stock General Electric Company (NYSE:GE) is set to step up to the earnings plate tomorrow morning. In addition, Goldman Sachs yesterday recommended purchasing long calls on GE, with the brokerage firm anticipating a post-earnings "relief rally" in the wake of GE's recent drop. It seems GE option players have taken this advice to heart, with calls flying across the tape.
So far today, GE has remained relatively flat, currently trading 0.1% lower at $29.02. For the year, however, GE has lost 6.7%, recently feeling downward pressure from its 20-day moving average. What's more, earlier this week, GE's 50-day moving average crossed below its 200-day moving average; this signal is known as the "death cross," and is usually viewed as a bearish sign for a stock.
In the option pits, however, today's traders are seemingly more optimistic. GE options are trading at twice their typical daily volume, with calls outpacing puts 48,000 to 38,000 contracts, respectively. Digging deeper, it looks like one trader may be rolling a position up and out, possibly selling to close the soon-to-expire October 29 calls, and buying to open the weekly 10/28 29.50-strike calls.
Widening the scope, the preference for calls isn't completely out of character for GE. Despite its technical weakness of late, the stock currently sports a 10-day call/put volume ratio of 1.72 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which sits higher than 85% of all other readings from the past year. It is possible that some of this call buying isn't just from "vanilla bulls," but could also be the result of short sellers hedging their bets, given GE's short interest is up over 25% in the last reporting period. It would take just under a week for traders to cover all of these shorted shares, at GE's average daily volume.
Whatever their motivation, option buyers seem to be getting quite a bargain on their bets. GE's Schaeffer's Volatility Index (SVI) of 17% sits lower than 79% of all other readings from the past 12 months, indicating near-term option traders are pricing in relatively muted volatility expectation. In the same vein, GE's Schaeffer's Volatility Scorecard (SVS) sits at a relatively elevated 86, indicating GE has tended to outperform volatility expectations over the past year.
So, what should traders expect from GE's earning report tomorrow? For the past eight quarters, the shares of General Electric Company (NYSE:GE) have averaged a single-session post-earnings swing of 1.4%, with the last three ending in negative territory. Currently, the options market is pricing in a single-day swing of 2.5% in either direction, based on implied volatility data. Whether that swing will live up to Goldman Sachs' "relief rally" prediction, or give short sellers what they're looking for, remains to be seen.
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