The financial sector sends its biggest hitter to the plate on Friday morning with Goldman Sachs Group Inc (GS) stepping into the batter’s box. Given the current market environment, “Golden Slacks” will likely hit it out of the park on earnings or strike out looking.
GS stock traded to a low of $178 on Wednesday following Tuesday’s close below $185 and the 100-day moving average. As you can see from the chart, there is additional risk to $175 and the 200-day moving average.
GS stock was in the same setup going into earnings back in mid-October before a blowout quarter. Goldman Sachs beat Wall Street’s estimates by $1.36 and topped revenue estimates by nearly $550 million.
Goldman was just above $177 going into the announcement and traded down to $171.26 before closing north of $172 despite the absolute blowout quarter. However, GS stock rebounded to push $190 by the end of that month.
Goldman Sachs beat analysts’ estimates the prior three quarters by $1.05, 58 cents and 38 cents per share, respectively. Last July, Goldman Sachs gained $2 on earnings, moving from $167 to $169. GS stock made a run to $177 late that month before testing $168 by the first week of August.
In mid-April of 2014, Goldman Sachs shares gained 22 cents following the earnings announcement and finished at $157 and change. A week later, GS stock was pushing $162. Last year, around this time frame, Goldman Sachs shares fell nearly $4 to close at $175. GS stock then tested a low of $159 on the first trading day of February, which represented a 15-point drop,
As you can see, there has been no love for Goldman Sachs stock on the day of its announcements, despite the incredible run of earnings beats.
The regular January options expire this Friday, and there are also weekly options available to trade on Goldman Sachs. The February options will allow more time for a trade to play out, but the premiums are expensive.
I usually like to trade options for under $1.25, and near-term, out-of-the-money options (OTM) on stocks over $100 usually demand much higher premiums.
For example, the GS February 190 calls are roughly $10 OTM, while the GS February 170 puts (GS150220C00170000) are also $10 OTM.
The cost for one contract of each of the aforementioned Goldman Sachs options would be $4.20 at current levels, which would create a strangle option trade.
The breakeven point for the trade would be $194 – $195 or $166 – $165, technically, by mid-February, which would require a $15 swing from current levels. While this price action is possible, it is also a risky bet.
Given Goldman Sachs’ earnings history over the past year, it might make better sense to “sell” these options. However, that strategy creates risk as well because the position is “naked,” or uncovered.
Goldman Sachs is the Dow Jones Industrial Average‘s second largest blue-chip stock and accounts for 6.64% of the index’s weight.
Spending nearly $2 on an option trade is like having the opportunity to play three trades of 60 cents to 70 cents per share. Stocks that trade under $100 usually have “cheaper” premiums on OTM call or put options, which is why I usually avoid stocks with triple-digit prices.
I will likely sit on the sidelines without trading Goldman Sachs this time around. It would be nice if GS shares rebounded to give the financial sector a much-needed lift, as there is downside risk if Goldman Sachs misses Wall Street’s expectations.
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