General Electric (NYSE: GE )
shares popped nearly 1% higher in Tuesday's trading as the broader
market welcomed some attention from buyers. GE has been
slowly recovering from its early-July low and yesterday a trader
opted for a bullish strategy. What's more, he or she financed
a long call purchase with the sale of a short put.
Typically, the combination of a short put and long call is known
as a synthetic long stock or sometimes a risk reversal. It's
a way options traders can use calls and puts to simulate the price
action of the underlying stock itself. (The profit/loss chart
below, as of today, demonstrates how the spread rises along with
the stock). One drawback to this strategy is that option
investors do not collect dividends, and GE's dividend yield is
currently more than 3%.
In this situation, the trader added an element of time. A
block of 10,000 January 15 puts were sold for $1.13 (a penny below
the bid at the time) and a same-sized block of the March 19 calls
were purchased for 38 cents (the ask price). The investor
collected a net credit of 75 cents for the spread.
Through January expiration, it behaves like a synthetic long
stock. After the puts expire, the investor is left holding a
long call. This call has unlimited potential gains above
$19.38 and a maximum loss of just 38 cents (the premium paid).
Remember that this net debit was offset, however, by the
credit collected for selling the near-the-money, shorter-term