GE Aerospace before earnings
GE Aerospace reports quarterly results tomorrow morning. Wall Street expects adjusted earnings of $1.86 per share, up more than 12% from a year ago. Revenue should come close to $12 billion, also a double-digit rise. The engine and services division drives the growth, up more than 30% in Q1. Shares beat the broader market so far this year and are up about 35% over the past year. The stock held a gain even while the wider market slipped ahead of the report.
Why the business is strong
The company dominates engines. It is the only engine supplier for the Boeing 737 MAX fleet. Planemaking is basically a duopoly between Boeing and Airbus, but engines are not. On Airbus jets, GE competes with Pratt & Whitney, which has been hurt by reliability problems and cracks in some engines. That leaves GE in a commanding spot with a massive order backlog.
Selling engines is only part of it. Two-thirds of revenue comes from servicing the engines it sells. Last quarter services grew 49% year over year, and orders grew about 87%. Spare parts add more. Airlines are keeping planes in service longer, which means more maintenance, so the backlog in engine services is the main draw. Total revenue grew 29% last quarter, above expectations, and another solid quarter is expected. GE also just signed a deal with United Airlines to supply all the engines for its 787 planes, adding to the backlog.
The services and spare-parts side lifts both revenue and margins, and has been the company's big winner. The future looks set by the size of the backlog. Two risks hang over the quarter: disruptions in the Middle East could drag results and raise costs, which might squeeze margins a little. Whether the stock goes up or down from here is unclear, but GE is winning against Pratt & Whitney and Rolls-Royce on engines.
The setup for the trades
The stock ran up strongly since about mid-April, then pulled back over the last couple of weeks before earnings. The option market prices a move of about plus or minus $17 in either direction on a one-day basis (the expected move started near $15 and rose toward $16-$17). Near-term implied volatility is high: the July 17th options carry about 84% to 84.5% implied volatility, while the July 24th weekly options sit near 50%. That gap between the two, called volatility dispersion, lowers the cost of trades that sell the expensive near-term option and buy the cheaper later one. Both trades below use the math to place the short strike at 370, which lines up with a one standard deviation expected move. If the stock lands right at 370, both trades make money.
Trade one: a bullish call calendar
This is a one-week bet on a bounce back after the recent selloff. It buys the July 24th 370 call (expires in 9 days) and sells the same 370 call in the July 17th expiration (expires in a couple of days). The front option is sold at about 84.5% implied volatility and the back one bought at about 50%, so the dispersion cuts the entry price. Entered at a $2.35 debit, it later traded below $2, near $1.80. The debit is the full risk: $180 if you pay $1.80, $235 if you pay $2.35. Because bid-ask spreads can be wide, checking the real price before entering makes sense.
The trade carries positive delta, so it leans bullish, with peak profit at or near the 370 strike. The profitable range runs from about 355 on the downside to about 385 on the upside. For a $355 stock, that is cheap upside exposure with limited risk. What you don't want: the stock to fall, or to jump more than about a two standard deviation move to the upside. There is a range-bound side to it, so the ideal outcome is the stock staying put or drifting toward 370.
Trade two: a short call vertical
This is more passive and can be wrong yet still profit. It uses the July 17th options that expire in 2 days, so very short-term earnings positioning. It sells the out-of-the-money 370 call and buys the 380 call, a risk-defined, $10-wide, neutral-to-bearish spread. It collects a credit of about $2.20 (lower later, around $1.70, so where the stock sits matters). With a $2.20 credit, that is the most you can make, against $780 at risk. The break-even sits at $372.20, giving almost a full one standard deviation cushion to the upside before the trade loses. The stock can fall, stay flat, or even rise; you just need it to finish below the 370 short strike. It has a higher probability of success and still takes a directional view, with a nice cushion up top.
How the two compare
Both trades center on the 370 strike, set by the one standard deviation expected move. One is bullish (the calendar), the other bearish (the vertical), and both profit if the stock goes straight to 370. Both harvest the elevated near-term implied volatility. The calendar also buys a longer-dated option, and the vol dispersion between the two lowers its entry cost. The vertical carries more risk than potential reward but has the better probability of success, since it can be wrong to the upside as long as the stock stays below roughly 372. Option pricing is not fixed truth; it just reflects supply and demand for where people will buy and sell, expressed as implied volatility levels. GE Aerospace shares stayed range-bound while the market waited for the earnings.
