This Giant’s Fall is a Lesson in Understanding Risk
How low can GE go? (According to this trader, a lot lower.)
My neighbor’s in-laws were in town last weekend. When they learned that I write a financial newsletter, they had one burning question for me…
“What do I do with my GE stock?”
I couldn’t help but answer their question with a question of my own.
“Well, how long do you plan on living?”
They were taken aback by my response.
I certainly didn’t mean to be insulting or sarcastic. My point was this: Unless they plan to live another 30 or 40 years, they’re not going to see their General Electric (NYSE: GE), commonly known as GE, stock recover enough to make any sort of difference.
After all, it would take a monumental culture change to see a company with a $68 billion market cap recover 25% from current levels. Even if we DO see that sort of recovery, GE stock will still be trading below $10 per share ($9.81 to be exact).
In other words, it’s dead money.
“But can it go any lower?” they asked – still dumbfounded it had fallen below $10.
Yes, it most certainly can. And today’s study of unusual options activity is proof. You see, just this morning, someone bought 2,500 GE January $8 puts. With the fill price at $2.10, that’s a $525,000 bet that GE will continue to trade well below $8 per share headed into January.
In many respects, this sad tale of GE stock is why we feel that so many traders view risk incorrectly. You see, when this nice couple bought GE stock, they thought they were making the safest, most risk-averse investment possible.
They planned to sleep soundly at night while making 3% to 5% per year – forever. But as it turned out, they ended up holding a stock that lost 57% over the last year.
In their efforts to avoid risk, they lost their shirts.
Why? Because they don’t properly understand how to view risk.
Instead of avoiding risk (as the GE investors attempted to do), we seek it out and embrace it.
We call it “smart speculation,” and we invite you to see the difference in real time.
In The War Room’s beta test last week, we made four smart speculations on trades that resulted in overnight returns of 39%, 28%, 43% and 39%.
When you put this sort of smart speculation in action for yourself – you’ll better understand what we’re talking about.