What The Option Market Is Saying About General Electric Following Fraud Allegations

General Electric Co GE took a 13% hit on Thursday after Bernie Madoff whistleblower Harry Markopolos bashed GE for allegedly committing insurance fraud that was "bigger than Enron and WorldCom combined."

The allegations triggered an extreme amount of unusually large GE options trades throughout the morning and early afternoon.

The Trades

On Thursday, Benzinga Pro subscribers received 136 option alerts related to unusually large GE trades. Here are how the trades broke down by type:

  • 21 large call purchases at or near the ask price.
  • 20 large call sales at or near the bid price.
  • 50 large put purchases at or near the ask price.
  • 45 large put sales at or near the bid price.

All together, the 70 total combined GE call sales and put purchases, which are typically considered bearish, slightly outweighed the combined 66 total combined call purchases and put sales, trades typically considered bullish. However, the fact that the distribution is relatively even is an indication that the market doesn’t exactly know what to make of GE at this point.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the sheer number of trades and the fact that they occurred at a range of sizes, prices and expiration dates, it’s likely there is a significant amount of institutional hedging going on. However, given the large amount of noise today, it can be easy for institutions to disguise their positions.

More Volatility Ahead?

GE investors have been through the ringer in the past couple of years. Prior to Thursday’s allegations, GE shares had bounced back significantly in 2019 under the leadership of CEO Larry Culp. He joined CNBC on Thursday to deny the accusations.

“GE will always take any allegation of financial misconduct seriously. But this is market manipulation – pure and simple,” Culp said.

Assuming the accusations are unfounded, GE stock could see a significant bounce off of Thursday’s lows. If the accusations are true, GE could ultimately end up going the route of Enron and Worldcom.

Not only are option traders likely hedging their bets on GE stock, they're also likely using options to bet on a volatile near-term outlook for GE as this story unfolds. The fact that the bullish and bearish trades were nearly equal suggests traders are waiting to see how the story plays out before committing to GE in one direction or the other.

GE's stock traded lower by 10.7% to $8.06 at time of publication.

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Photo credit: Empoor, Wikimedia Commons

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