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Posted October 3, 2023 at 10:30 am
As the earnings season approaches, many eyes are on General Electric (GE), with the company set to release its results on October 24, 2023. GE has had an impressive run over the past year, recording a surge of 72.4% in its stock price, starkly outperforming the broader market’s gain of just 17.1%. However, since its last earnings announcement on July 25, 2023, when the stock jumped 6.3% to close at $117.08, it has somewhat retreated, hovering around the $110.77 mark.
Given this backdrop, the impending earnings release provides an interesting opportunity for option traders. Especially when considering strategies that capitalize on potential stock price movements and the characteristic surge in implied volatility (IV) leading up to earnings.
A popular tactic among seasoned traders in such scenarios is the calendar spread. The essence of this strategy involves playing two options against each other: one that expires before the earnings release and another that expires afterward. The anticipated rise in IV usually leading up to the earnings is the main catalyst this strategy seeks to benefit from.
For GE, we’ve pinpointed an appealing calendar spread:
Sell: 20-Oct-23 115 Call
Buy: 27-Oct-23 115 Call
Currently, the market quotes this spread at $1.11. The longer-dated option encompasses the earnings release, while the shorter-dated option will expire before GE’s earnings announcement. By executing this time spread, the sale of the shorter-dated option can help offset part of the purchase price of the longer-dated option. The ideal scenario? The shorter-dated option expires worthless, and the remaining option appreciates due to the increased implied volatility as earnings approach.
Our analysis dug deeper into the historical performance of this specific option setup. Findings suggest a historical mean value of $1.31 for the spread. This places the current market price at a theoretical discount of around 15% compared to its historical average.
Moreover, potential profit simulations reveal encouraging outcomes. If GE’s stock drifts to the strike price before the shorter-dated option’s expiration and the implied volatility returns to its historical average, we estimate a potential profit surge of up to 220%.
A major advantage of buying a calendar spread is the limited risk. The maximum loss an investor can incur is confined to the spread’s purchase price. However, traders should be aware of the assignment risk, especially if the option remains in-the-money by its expiration date.
As GE’s earnings day nears, traders looking to exploit the expected IV surge have an opportunity in the form of a calendar spread. Not only is the spread currently trading at an attractive discount relative to its historical pricing, but it also offers a high potential return, and limited risk. As always, while strategies like these offer potential rewards, it’s essential to approach them with a comprehensive understanding and stay vigilant to market movements.
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Originally Posted September 29, 2023 – We Examine GE’s Pre-Earnings Options Calendar Spread for October
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