Thinking about my GE bull position

My bull call options spread on General Electric Co. (GE) is in danger of being on the wrong side of the chart.

GE is showing a parabolic sar bear signal today, buttressed by a bear flag from Person's Proprietary Signal, a declining macd below the zero line, and a stochastic plunging through the neutral zone toward oversold territory.


If I owned only a shares of GE, then I would be pushing the sell button at this point. Options, however, give me more -- well, options, ways to fix the position and salvage a profit.

Here are the facts:

• The position expires in 30 days, plenty of time for the price to make a major move up or down.
• The bear signals run counter to the trend that has been in force since early March. That's the bull case.
• It can be considered that the trend ended in mid-March and what we've seen is a sideways correction with an overshoot right before earnings. That's the bear case.
• The stock is trading now at $18.71, and the support level runs around $18.25 or so. This stock isn't standing over a sinkhole. That's a bull case.
• The last psar bear phase lasted seven trading days and saw no price movement downward. A bull case.
• The last bull phase lasted eight trading days and saw a price move upward that was quickly retraced. A bear case.

All in all, I think, I have every reason to try to fix the position rather than closing for a small loss. I suspect the trend will be sideways, and maybe up. Much of that depends upon what happens to the broader market, given GE's huge size and commanding position in the economy.

The positions is structured as long the $18 call and short the $19 call for a 64¢ debit. My basis with that structured is $18.64. So the goal must be to lower my basis.

There are several ways of fixing the position if the price goes down.

One is convert it into a ratio spread. I would close my $18 long call and sell an another $18 long call for $1.90 total, and then use that money to buy a $17 call for $1.81.

So that leaves me long the $17, short the $18 and short the $19. Basically, its a bull call spread with a naked call attached.

If the price goes down, the short calls are worth more, and since they're doubled up, they'll gain more than the long call loses.

Personally, I don't like naked calls. They have unlimited risk and take a huge amount of capital as backing. On the other hand, this adjustment is free. The cost of buying the $17 call was offset by the gain from selling the two $18 calls.

Here's a second method. It costs money, but is fully clothed.

I sell two $18 calls. This closes my existing long $18 call for a 31¢ loss and gives me an addtional &94 from the sale of the second $18 call. My net gain is ¢63.

Simultaneously, I buy a $17 call for $1.81. So the net cost of the adjustment is $1.18.

It leaves me with a bull call spread, but its long the $17 and short the $18, rather than being a +$18/-$19 as before, and the beak-even is $17.86, below support.

A third option, if the price looks like it's really plunging, would be to buy a put. It gains as the spread loses.

Buying a put is always a good strategy for a position -- whether shares or options -- that starts heading south.

And of course the fourth option is simply to close the position, but I hate to do that so far out from expiration.

Here's the posting from when I opened the position, and it links back further to the initial analysis.

My overall point is that so many people trade out of Manichaean belief: A trade is either right or wrong, good or evil, and if evil, it must exorcised from the portfolio, with bell, book and candle.

A smart trader treats positions like markers in a game of Go or pieces on a chessboard. You plunk them down, and see what happens. If a position deteriorates, you buttress it or mitigate it, or in the case of chess, you move the piece to avoid capture.

The gameboard mind-set says that there are no evil positions, only positions that need to be improved.

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