General Electric (GE) has become THE disaster and rescue story in the U.S. stock market this year. Since it’s near-death experience in the financial crisis, GE ground out a slow but steady recovery before peaking in the summer of 2016 in the middle of a head and shoulders topping formation. That top fell well short of the peak from the prior bull market (2007) which itself fell far short of the peak of the bull cycle before that (2000). This is about as long-term ugly as a big company can get!
GE’s recent expulsion from the Dow Industrial Jones Average was the final insult. Now, CNBC’s Jim Cramer himself has stopped “equivocating” on the stock and declared it a buy.
After explaining GE’s poor performance, Cramer granted his strong approval of the company’s recent strategic review and expressed his high confidence in CEO John Flannery claiming “he is the man for the job.” Cramer advised his audience to start buying now and buy more if the stock hits the $11 target of GE bear Steve Tusa from J.P. Morgan (JPM). Cramer calculated a risk/reward of 2 points down and 5 points up from Thursday’s close of $13.43. He also cautioned that the reward will take some time to play out.
Rather than buy shares on a play like this, I strongly prefer options. Just in case GE really does collapse (after all, markets and economies are now facing down the long barrel of a trade war), the loss on the position is tightly capped at the price of the options.
Moreover, the options on GE are very cheap for the presumed risk/reward. The $15 strike call options expiring on January 17, 2020 only cost $1.50 with GE closing Friday at $13.85. With a long-term price target of $18.50 or so, these call options could be worth as much as $3.50, more than a double. With a delta of around 0.5, the call options would fall to around $0.5 if GE first fell to $11 before rebounding. At that point, a Cramer trade would back up the truck in anticipation of a potential 7x gain from doubling down.
Source for charts: TradingView.com
Be careful out there!
Full disclosure: long GE call options