General Electric Stock is Losing Power

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General Electric (NYSE:GE) has followed in the footsteps of the broad market recovery. But the enthusiasm that provided much of the lift over the past six months seems to be waning. While it’s too soon to call the uptrend dead, there’s no denying the trajectory has shifted from up to sideways – at least on the daily chart. Directional traders tiring of the drift should consider tapping into the power of GE stock options.

Source: Sundry Photography / Shutterstock.com

There are multiple strategies you can use that will generate a profit even if prices remain stuck.

Even better, the trade we’ll highlight below provides some protection to offset minor losses that may strike over the coming month. The market’s rug-pull on Tuesday is re-introducing risk into the market. If it’s the first barrage of a more serious salvo, then now is the perfect time to reduce the risk of GE stock positions.

Let’s take a closer look at the price chart.

GE Stock Charts

Source: The thinkorswim® platform from TD Ameritrade

In fairness to bulls, the weekly trend remains constructive. That, perhaps more than anything else, demands holding fast to an optimistic forecast.

General Electric has climbed considerably from last year’s depths. It’s up approximately 141% from the lows and arguably deserving of the recent rest. Consolidation periods like this allow overbought pressures to ease and a healthier trend to develop. The 20-week moving average is almost caught up, hopefully bringing fresh buyers in its wake.

We can better see the neutrality developing on the daily chart. In contrast to the 20-week average, which is still pushing higher, the 20-day moving average has been treading water for six weeks. With today’s market swoon, GE is threatening to break its 50-day moving average. It’s not a good look, but multiple pivot lows are looming beneath that could act as support to stave off a deeper decline.

Rather than get lost in the minutia, let’s make it easy. Until GE stock takes out $14 on the high end or $12 on the low end, it’s in a range. If you currently own the stock, consider selling covered calls to enhance your returns. I suggest either waiting for a breakout above $14 to justify piling in for those looking to buy GE now. If you must buy now, then sell calls against the stock to reduce your cost basis and have the potential for cash flow if the neutrality persists.

Source: The thinkorswim® platform from TD Ameritrade

For the uninitiated, let’s provide a brief overview of the covered call. Then, we’ll end with how to build one on GE stock.

Covered Calls

The covered call consists of buying 100 shares of stock and selling one call option. By selling the call, you obligate yourself to sell your stock at a particular price. In exchange, you get paid a premium, which acts as potential cash flow or protection against small losses in the stock. Since you’re promising to sell your stock, the short call caps your profit potential in the stock. As such, it’s considered a neutral to mildly bullish strategy.

Typically, traders sell short-term options to capitalize on the higher rate of time decay. It also allows more flexibility in modifying the strike price each month to adapt for movements in the stock price.

If you don’t already own 100 shares of GE, then you’ll have to buy them before selling the call. At the time of this writing, the stock was trading near $13. When it comes to which option to sell, here are the two choices that I’d consider.

The More Conservative Call: Sell the June $13 call for 67 cents.

This offers approximately $67 of income/protection per 100 shares of stock. But, it obligates you to sell the stock at $13, so your upside is capped right quickly.

The More Aggressive Call: Sell the June $14 call for 27 cents.

This offers approximately $27 of income/protection per 100 shares of stock. Because it doesn’t require you to sell the stock until $14, you have more potential profit potential in GE stock.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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