Bet on Resilient GS Stock With This Credit Spread

by John Kmiecik | January 21, 2014 8:47 am

Bet on Resilient GS Stock With This Credit Spread

The three-day weekend is over for traders and now it is time to get back to trying to extract money from the market. Here is a options idea on a well-known company that should help add to your profits in February — Goldman Sachs (GS[1]).

Goldman Sachs Group Inc. (GS): Put Credit Spread

The trade: Sell the February 165/170 Put Credit Spread (selling the February 170 put and buying the February 165 put) for 70 cents or better.

The strategy: The maximum potential profit for this trade is 70 cents if GS is trading above $170 at February expiration. The maximum loss is $4.30 ($5 – $0.70) if GS is trading below $165 at February expiration. Breakeven is $169.30 at expiration based on a credit of 70 cents.

The rationale: Goldman Sachs announced earnings recently, and investors weren’t overjoyed with the results. Trading income was down for GS stock, continuing what has become an industry-wide problem. Trading volume on the NYSE, for example, has consistently been below average for a couple of months.

Goldman’s profit fell 21% as bond trading dropped 11% after being adjusted. However, the banking giant did eclipse its earnings per share estimate by almost 40 cents due to healthy investment banking revenues and by cutting revenue compensation. The company has made a conscious effort to control how generous it had been in the past.

So, is the stock finished now? As mentioned in previous trade ideas on GS stock, the company has faced adversity before and it has usually come out on the bullish-end. For this trade idea to profit, the stock needs to be resilient once again.

GSchart Bet on Resilient GS Stock With This Credit Spread
Click to Enlarge

If you take a look at Goldman’s chart, GS stock has several areas of possible support to help this trade profit. Over the last month or so, the stock has found a critical level of support at $175 from previous pivot levels. In fact, the day GS stock moved lower after earnings, it closed just above $175. GS stock also has a potential support area at $170. This area acted as resistance for the stock on multiple occasions over the last six months. Now resistance needs to become support.

In addition, the 50-day simple moving average for GS stock is currently sitting just above $170. Moving averages will sometimes act as support or resistance for the stock. Even thought the implied volatility of the options has dropped after the announcement, it still may continue to drop, which could lower the spread’s premium in the future. Goldman needs to get up, shake it off and get back to its bullish trend!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities. Get a free trial of John’s live options trading room here[2].

Endnotes:
  1. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  2. free trial of John’s live options trading room here: http://markettaker.com/options_insider_trial/

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