Will $GE cut their dividend again?

Will GE cut their dividend?

There is speculation that $GE will cut their dividend again in the near future.  After a terrific fall from grace, $GE is languishing around $11.70 with no real turn around in sight.  I have to admit writing 12.5 and 13 puts has not been a winner lately even owning back month 12 puts.  We can’t win all the time.  However the pricing is getting a bit odd in $GE options so I thought it would be worth a look.

Cost of Carry Calculations

In the Option Pit Pro Chat Room there was some talk that GE was getting harder to borrow.  I decided to look at the option prices and see for myself.  That would save me from looking at the 13 puts I will need to roll at some point.  Right now there is a .12 projected dividend on Dec 14th with mid-Mar and mid-Jun as traditional ex-D dates.  So there should be 3 dividend of .12 by the Jun expiration cycle totaling .36.  The interest rebate to the Jun21 11 strike is 11 x .015 x 257/365 = .12.  That is the expected return shorting $GE until Jun with a 1.5% short rebate.  The .12 rebate less the dividend of .36 is .24 or the cost to short $GE to Jun.  I would expect the call combination to price .24 underwater.

Option Montage by CBOE Livevolpro

Calculating the GE Synthetic stock price

Any Jun combination, long call and short put, should trade .24 underwater which just means “parity to the stock price”.  If we price the liquidity provider way on the Jun21 11 strike, buy calls on the bid and sell puts on the offer, the combination is 1.61 over .82 or .79 with GE trading 11.71.  That would be an 11.79 synthetic stock purchase with an 11.71 stock sale.  The liquidity provider has to give up .08 plus the .24 Cost of Carry or .32 to short GE right now with the expected dividend stream to Jun.

Something looks amiss.  As it prices the Liquidity Provider doesn’t expect to pay out 3, .12 dividends to Jun.  As we can see from the Open Interest, there is serious action on the 12 strike, possibly left over reversal conversions.  It appears from the pricing the dividend cut should be down to .06 or less per quarter.  There has been plenty of ink spilled on this but the options tell the same story.  Unfortunately the dividend cut is already priced in the options.  I am not sure how low $GE can go but some 10 puts in the Jan cycle could work.  Maybe the real rebound starts there.

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Disclosure- $GE positions.

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