Quick Cash with GE Calls

The Trade:

03/28/2008
+ 2 GE May 08 38 CALL @ $0.89
-$178

04/01/2008
-2 GE May 08 38 Call @ $1.48
+$296

Total Profit: $118 (66%) 4 Days



Why?

I was doing some reading about GE and its performance in the market. Fundamentally the company is sound and Fool has some great information on them. There were a lot of technical indicators that GE was poised for a bullish move. I would go over them but I would just be regurgitating what I read on Trading Goddess. After doing some more research I decided to open a position which would capitalize on any short term upside move by GE. I did this by buying naked calls, near the money, and about 2 months to expiration (allowing me plenty of time to be right or dump my position and cut losses). I also did this on a down day, to capitalize from the lower call prices. Like life, timing is everything with options.

Today, the start of the second quarter, resulted in a nice rally for the markets. Hopefully this isn't some kind of cruel April Fool's joke, and the markets will be able to continue this trend. Yesterday, my position was at a 0.5% loss. I had set the stop loss at 8% so I waiting patiently either to cut my losses or capture some gain. The market rally today helped GE rally 3% and my contracts were up 66% (the awesome effect of leverage).

The stock has passed my strike price ($38/share), and I still have a whole month to go before the May expiration. Yet, I sold of the position because you never know what is going to happen in these markets. It is best to be disciplined and take realized gains rather than watch it turn into losses. I'm happy collecting 66% in 4 days and moving on to the next pick rather than brood over "what-if" situations.

Lesson: Make a pick based off strong fundamental and technical indicators. Looking at the chart, when the share price crossed the 50 day moving average, and created the double cup, the bullish elements were clear. Also, if I had more conviction I would actually short GE today by buying some near term, in the money, puts. Stick to the game plan. Get in, get out, either with gains or a capped loss.