General Electric's disastrous earnings report caught traders off guard

AP Images / Richard Drew

• General Electric is paying the price for a poor earnings season, which saw it cut forward guidance
• Options traders were woefully unhedged for the drop, while short sellers weren't effectively positioned to profit from the decline

General Electric's stock is getting whacked after the company fell short of analyst estimates and slashed its forecast.

And to make matters worse, traders weren't braced for a drop that stretched as deep as 6.3% in the company's shares on Friday, a loss that has the stock at its lowest level in more than four years.

They were paying the lowest premium in eight years to protect against a decline in GE's stock, relative to bets on an increase, according to data compiled by Bloomberg. In other words, they were completely unhedged against the type of damage the stock incurred on Friday.

Business Insider / Joe Ciolli, data from Bloomberg

Traders were the most unhedged in eight years on GE heading into the company's earnings disaster.

In addition, short interest on GE - a measure of bets that the stock will fall - actually declined heading into the earnings report, implying that investors were getting more confident in the preceding weeks. It was an acceleration of a bullish trend seen all year, as short interest as a percentage of shares available to loan has dropped precipitously from 2017 highs, according to IHS Markit data.

Based on trading activity, investors are scrambling to make up for lost ground. Less than 10 minutes into Friday's trading session, GE's stock had already seen two-thirds of the volume it normally sees in a full day.

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