For a stock that was circling the drain last year, General Electric Co. (NYSE: GE) sure had a nice comeback in early 2019. It gained nearly 72% from its December lows to its February highs. Not too shabby for a company that was selling off pieces of itself just to keep the lights on.
It was no wonder investors were licking their chops to buy the resurrection of what was once the bluest of the blue-chip stocks.
However, Money Morning Quantitative Specialist Chris Johnson thinks the party is over. Wall Street has gotten ahead of itself in its optimism about the company, and that's creating an earnings season options play for you.
It is easy to see Chris is right, because the stock's most recent performance looks like the wheels fell off. Shares are down 19% through Tuesday's close, and the technical condition on the charts is quite ugly.
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What's worse for GE hopefuls is that the broad market looks pretty good. It is still in rally mode since the December bottom, and several sectors, including big tech, are showing good leadership. Even small stocks show more moxie as the Russell 2000 continues to claw its way higher. That means the strong stock market is not bailing out what is once again a weak General Electric.
Just take a look at the GE stock chart. You can see how the stock recovered from the December lows and then began getting squeezed by the 50-day and 200-day moving averages. The stock responded by breaking out to the downside.
That's a bearish sign as it is. But Chris thinks the April 30th earnings report could be the final straw as the company tries to "get all the bad news out there."
He sees the $9 level as the tipping point for GE shares. If that does not hold, the next stop could be $8 per share, and that would be an additional loss of 11%. And a weak earnings can only serve as a catalyst to accelerate this nosedive.
Fortunately, you can turn GE's collapse into a 218% windfall. Or even more. Just look at this 220% winner we uncovered two weeks ago.
Here's how to set up the trade for maximum gains...
Making Some Real Money with GE
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Of course, we here at Money Morning won't snub our noses at a quick 11% profit made by shorting the stock. But we also realize that readers want serious gains, not just ordinary ones.
To accomplish that, we need to use a little leverage and harness the power of options. Buying a put option on GE stock can ramp up the profit potential and risk only a fraction of the money compared to selling the stock short. The most we can lose is the cost of the options contract, but the gain can be in the triple digits.
There are many different options to use but we need one that expires after earnings, has a strike price "near the money," which we'll explain in a moment, and is active enough to provide a liquid market.
First, the expiration. If earnings come out April 30, we'll aim for a contract that expires a few weeks later. The May 17 expiration gives us some time to work with, but not so much time that we have to pay a much higher price for it.
The strike price is the price at which you have the right to sell the underlying stock. We want something near that strike price, and fortunately there is a $9 strike available.
Finally, we want a reasonably active market. The May 17 $9 put option is one of the most highly traded options on GE stock. Check, check, and check.
The ask price for this option was $0.35 as of Monday (April 22), or $35 per contract. Each contract controls 100 shares of GE stock, so we have to multiply the price by 100.
If we let the option run until the May 17 expiration and Johnson's stock target of $8 per share is met, the option will be worth $1 - the difference between the strike price and the stock's closing price.
That would result in a cool gain of 138.1%.
Of course, if the stock falls before expiration, the options price can rise even faster and result in an even higher profit. If GE shares fall to $8 a share on May 1, the day after the earnings report comes out, the options contract could bring you a profit of $72 a contract, a 218% gain.
And if GE falls below $8 a share, then you could be looking at even bigger gains.
But you don't have to stop there either. Earnings season is one of the biggest catalysts for options trading you'll see all year.
Find out how to play it right here...
Get Your Q1 Earnings Playbook Before April 23
Hundreds of companies are set to report earnings in the coming weeks, but only one sector may be worth your time (and money).
We've pinpointed exactly which stocks in that sector are the strongest - and the most likely to produce market-crushing returns - in the Q1 Earnings Playbook.
Follow along, and you could be raking in $30,000 in the next 10 weeks.