General Electric (GE) continues to cut. By reducing its global headcount by 12,000, Action Alerts PLUS holding GE anticipates it will reach its target of $1 billion in cost reductions by 2018 -- on its way to $3.5 billion in total cost reductions. This won't trickle dollar for dollar to the bottom line, but if these goals can be achieved, it's possible we see the bottom line boosted by $0.15 to $0.20. Given the recent struggles, any boost to the company's earnings should bring traders back into the stock. Add in the $4 billion in dividend cuts and these start becoming real numbers. GE does need these cuts, though, if it hopes to maintain the reduced dividend, as 85% of its free-cash-flow is still paid out to shareholders.
The market is forward-looking, which is why we likely saw some buyers come into GE Thursday. Traders can see exactly what I mentioned in regards to cost cutting and the potential impact to earnings. The 2.7% yield will still attract some income-oriented folks -- and those not believing GE to be a value trap are nibbling. We do have the concerns of tax harvesting, those selling to recognize the tax loss in 2017. Some of these sellers should buy the stock back after the 30-day wash period passes, while others will move on.
Speaking of dividends, GE is set to pay out $0.12 this month, so this one sets up well for a buy-write (covered call) trade into the New Year. There is a bullish divergence on the daily chart in the form of the Commodity Channel Index (CCI), with the CCI making a series of higher lows and higher highs -- unlike the price. Also, the distance between the VTX- (red line) and the VTX+ (green line) in the Vortex Indicator is tighter. This is similar to higher lows, so when combined with the stock pushing above the resistance of the current pennant, I'm inclined to take a small shot on the long side.
--Buy to open 100 shares GE at the market (currently $17.92);
--Sell to open 1 January 5, 2018, $18.50 call at $0.22;
--Net cost $1770;
--Max risk $1770;
--Max reward $80 (not inclusive of dividend);
--Days until expiration: 29.
I'm targeting the $18.50 call, as it roughly targets the 20-day simple moving average over the next few weeks. Ultimately, I think GE can trade a bit higher, but I'm staying tight in case the rally fizzles. The upside doesn't include the dividend, so the potential maximum reward is a bit above $90 here.
If GE surges, it is possible shares would be called before the dividend can be paid, but that would require a push well above $18.50 in the next week. Possible, but not likely, and acceptable should it occur. The Jan. 5 date allows me to enjoy the decay of the holidays, both Christmas and New Year's Day. While somewhat priced in, the day's close, the lack of volatility on days like Christmas Eve and New Year's Eve (or the days they are observed by traders) isn't necessarily there.
This commentary originally appeared on Real Money Pro on Dec. 7. Click here to learn about this dynamic market information service for active traders.