by John Kmiecik | January 22, 2013 8:28 am
Many option traders will tend to ignore buying calls for a bullish outlook on a stock. They might have heard that novices buy options and professionals sell them. But what they tend to forget is that long calls have unlimited profit potential, unlike a spread trade.
Here’s a trade idea on a stock that looks to have plenty of room to run and earn profits for you, so why limit that?
Goldman Sachs Group (NYSE:GS – $144.45): Long Calls
The trade: Buy the February 145 calls for $3.05 or less.
The strategy: The long call strategy is relatively straightforward. The trade can profit if the stock rises and the call premium increases as the GS option moves more and more in-the-money (ITM). Maximum profit is unlimited because GS can continue to rise, and the maximum loss is $3.05, or whatever was paid, if GS finishes below $145 at February expiration. Breakeven is $148.05 based on a cost of $3.05 at expiration.
The rationale: You may have heard the saying before that Goldman Sachs rules the trading street. If you look at its last earnings numbers, that’s hard to argue. The banking giant reported earnings last week and had revenue of over $9 billion and earned $5.60 per share, which was way ahead of estimates. Earnings rose 190% year-over-year. If there’s one thing for sure, it’s that Goldman knows how to make money.
Click to EnlargeThe stock has been in a solid uptrend since early December and recently gapped up after the earnings report. Pulling the chart out to two years, the stock is trading above its weekly 200-day simple average for the first time in nearly two years. It really doesn’t have any resistance to contend with until about $160, about $15 higher.
If investors can keep that warm and fuzzy feeling going about the company, it may just make it to that resistance level sooner than later.
As of this writing, John Kmiecik didn’t own any securities mentioned here.
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