GE’s (GE) Dividend Plans Prompt a Ratings Boost to its Stock

Early Wednesday, Sterne Agee upgraded its rating on General Electric (NYSE: GE) to “neutral” from “sell.” The stock hit a new 15-month high of $18.40 in midday trading, and is up about a nickel to $18.13 in late-afternoon trading. A bit of background for this upgrade: GE has seen a lot of attention this week as the company is hoping to boost its dividends in 2011. Last year, GE cut its dividend for the first time since the 1930s, but is aiming to have its dividend growth back on track by next year. Additionally, GE said it might repurchase shares for the first time since 2008.

While research and brokerage firms are largely limited to “buy,” “hold/neutral,” and “sell” designations, options traders have a wider selection of strategies and tools. They can execute a trade based on direction, volatility (or lack thereof), or any number of expected scenarios. If you are new to options and still trying to get your feet wet, it’s helpful to start by trying your trades in a virtual trading account.

Whether you are optimistic on GE or expect its latest rally to draw to fizzle there may be options strategies that can work for you. Below are just two examples of ways options investors could trade GE. These are not buy-sell-hold recommendations – just a pair of potential strategies in the bullish and bearish camps.

*Option prices given as of Wednesday afternoon

Bullish Option Strategy: Synthetic Long Stock (Split Strikes)
Investors who are bulled up on GE could buy the January 20 calls for $1.00 and simultaneously sell the January 17.5 puts for $1.60, collecting 60 cents for this synthetic long stock (split strikes). This strategy is a way to simulate a long stock position without requiring the capital necessary to buy the shares outright. Remember, with long calls, you do not receive the dividends; so you have to believe GE shares will appreciate.

The chart below demonstrates the profit/loss of this spread at expiration. Between the 17.50 and 20 levels, the gains are capped at the 60 cents collected. Above the 20 strike, gains are equal to stock or theoretically unlimited. Below $16.90, losses again track that of long stock and could be as high as $16.90 in the unlikely event that GE moves to zero.  Prior to expiration, this spread simulates a long stock, with unlimited upside potential and significant downside (limited only by the zero level).

Bearish Option Strategy: Bear Call Spread

Investors who think GE could reverse course or think expectations are set too high on the dividend front might consider a long-dated bear call spread. The January 20/22.50 call spread can be sold by selling the 20-strike call, and buying the 22.50-strike call, which could enable the investor to collect an overall debit credit of 50 cents. Maximum profit is limited to this credit received and is achieved if the stock price is below the 20 level. Maximum loss, meanwhile, is limited to $2.00 (the difference in strike prices minus the net premium received). GE would need to be trading above $22.50 in order for maximum loss to occur. Finally, breakeven at expiration is $20.50. Below this level, the call spread seller makes money.

GE can possibly “bring good things” to your portfolio, but how might you go about trading it?

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