GE options volume surges on Synchrony swap

Fri Nov 13, 2015 4:03pm EST
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By Saqib Iqbal Ahmed

NEW YORK (Reuters) - General Electric options have dominated the market this week, as traders have been using a complex trading strategy to take advantage of the conglomerate's tender offer for Synchrony Financial (SYF.N: Quote) shares to make a small profit.

GE, which owns about 85 percent of Synchrony and spun off the consumer-finance company as part of its broader retreat from financial services, recently commenced a tender offer where GE investors can turn in shares in exchange for Synchrony shares at a discount.

The exchange offer, scheduled to end at midnight on November 16, 2015, has spurred a flurry of trading in GE's shares, with weekly trading volume on track to hit a six-year high. GE shares hit a 7-year high of $30.89 on Thursday.

There has been a record surge in GE’s options trading volume as investors look to hedge their risk of holding GE. The point of the trade is to be able to take advantage of the tender without worrying about taking losses in GE while holding the shares.

Traders are employing a strategy that provides a nearly risk-free way of extracting a small profit from the exchange offer and hinges on their being able swap their GE shares for Synchrony shares at a discount to the market price.

The trade, called a conversion, involves opening a "three-legged" complex options strategy by taking a long position in the stock, selling call options, and buying put options.

Traders sell calls and buy put options at the same strike price and with identical expirations. This creates a synthetic short position that offsets the long position in the actual stock.

Calls convey the right to buy shares at a fixed price in the future, while puts convey the right to sell the shares.   Continued...

The logo of General Electric is pictured at the 26th World Gas Conference in Paris, France, June 2, 2015.  REUTERS/Benoit Tessier/Files