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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) 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.
On Thursday, the company said each share of GE that is validly tendered will fetch 1.0505 shares of Synchrony. On Friday, GE shares were up 13 cents to $30.29 and Synchrony shares were down 11 cents to $30.68.
"Economically there is no real risk. GE can go up or down a 100 percent and it would be offset perfectly (by the options position),” Trade Alert President Henry Schwartz said.
“But I can take all the GE stock and tender it to get Synchrony shares at a discount," he said.
Average daily trading volume in GE options in November has exploded to 1.4 million contracts, about 14 times the average for the rest of the year.
Thursday marked the sixth straight day that GE's options were the most heavily traded single stock name. They account for 14 percent of all single stock options volume in November, according to options analytics firm Trade Alert data.
"Nobody would be doing this for any other reason than this tender," said Andrew Wilkinson, chief market strategist at Interactive Brokers LLC in Greenwich, Connecticut.
The number of open options contracts on GE has exploded to 17 million, up from just 3.7 million on October 19 when GE commenced the exchange offer.
Nearly 6.6 million listed contracts, which equates to 660 million shares, is linked to this strategy, according to Trade Alert estimates.
Pfizer Inc's options (PFE.N) saw a similar, though smaller, bump in trading volume in June 2013 when the pharmaceutical company spin off its majority stake in animal health business Zoetis Inc (ZTS.N).
Reporting by Saqib Iqbal Ahmed