GE Aerospace Bear Put Spread Could Return 208% in the Next Few Months
GE Aerospace (GE) stock has had a phenomenal run in the last few months, rising 49% in six months.
However, the chart is showing some negative divergence and it could be due for a pullback.
Today, we’re going to look at a Bear Put spread trade that assumes GE will continue to move lower after dropping 3.25% yesterday.
A Bear Put spread is a bearish trade that also benefits from a rise in implied volatility.
The maximum risk for a Bear Put spread is limited to the premium paid while the maximum potential profit is also capped.
The maximum profit is equal to the width between the strikes less the premium paid.
GE BEAR CALL SPREAD
To create a Bear Put spread, we buy an out-of-the-money put and then sell another put further out-of-the-money.
Buying the September 19 put with a strike price of $230 and selling the $220 put would create a Bear Put spread.
This spread was trading for around $2.45 yesterday. That means a trader buying this spread would pay $245 in option premium and would have a maximum profit of $755.
That represents a 208% return on risk between now and September 19 if GE stock falls below $220.
If GE stock closes above $230 on the expiration date the trade loses the full $245.
The breakeven point for the Bear Put spread is $227.55 which is calculated as $230 minus the $2.45 option premium per contract.
COMPANY DETAILS
The trade is not without risk as GE is a highly rated stock at the moment.
The Barchart Technical Opinion rating is a 100% Buy with a Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
GE Aerospace (erstwhile General Electric Company) is a leading designer, developer and producer of jet engines, components and integrated systems for military, commercial and business aircraft.
The company is well-known for its aero-derivative gas turbines for marine applications.
Its zeal to invest in upgrades and innovation of products along with outstanding service capabilities and technological expertise raises its competitive appeal.
Founded in 1892, General Electric (now GE Aerospace) is currently headquartered in Evendale, OH.
The company operates its businesses in the United States, Europe, Asia, the Middle East and Africa, and the Americas.
Its products and services range from jet engines like LEAP, GE9X & GEnx, airframes, avionics systems, aviation electric power systems, turboprop engines, engine gear, and transmission components and services among others.
Conclusion And Risk Management
One way to set a stop loss for a Bear Put spread is based on the premium paid. In this case, we paid $245, so we could set a stop loss equal to the 50% of the premium paid, or a loss of around $120.
Another stop loss level could be if the stock broke above $260.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.