Market Insights

Someone seems to think this year’s worst-performing S&P 500 member won’t have a happy New Year.

Here’s a breakdown of a large options trade in General Electric (GE):

• A block of 12,500 December 8 puts was sold for $0.79 and an equal number of December 7s was bought for $0.30. Volume was below open interest in each, which indicates an existing bearish put spread was closed.
• At the same time, 30,000 January 6.50 puts were bought for $0.20 and 30,000 January 5.50 puts were sold for $0.05. That was a new bearish spread.

Remember that owning puts fixes the price at which a security can be sold, while selling them generates income and creates an obligation to buy. The two strategies can be combined in a spread, letting traders control a move between two levels. (See our Knowledge Center.)

In the case of today’s transaction, it looks like the investor had a winning trade in the December spread. He or she sold it for $612,500 and entered the January position for $450,000 — effectively taking $162,500 off the table. They now have the potential to make more than twice as much profit from a bigger drop because more contracts are at play.

General Electric (GE) chart since the start of 2017, with 50- and 20-day moving averages.

GE fell 2.24 percent to $7.41 and has lost 57 percent of its value this year. Just two years ago the former industrial giant was among the 10 largest companies in the world by market cap.

A combination of slowing business and management turmoil has exacerbated its slide. Perhaps even worse has been the drag from its massive pile of once AAA-rated debt that’s now at risk of falling to junk.

The bearish roll in GE is the largest options transaction for any equity in the entire market today.

Disclosure: This post is intended for educational purposes only and shouldn’t be interpreted as a trade recommendation. Options trading may not be suitable for all investors.