Goldman Sachs Group Inc: Bank Some Profits on GS Weakness

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Last week’s pre-Christmas rally lifted many a beaten down stock. And many of them are likely to fall right back down once the holiday euphoria subsides — particularly those boasting downtrends.

Goldman Sachs Group Inc: Bank Some Profits on GS WeaknessGoldman Sachs Group Inc (GS) is one such stock. Despite a valiant rally attempt by the bulls, GS stock remains firmly in a downtrend, with resistance levels aplenty looming overhead.

And this isn’t just a minor downtrend, mind you. GS sits below all major moving averages showing its trend is pointing lower on darn near any time frame.

Given the bears’ dominance, any and all bounces in GS stock should be eyed with skepticism, and last week’s pop is no exception.

The past three rebounds in Goldman Sachs have been stymied by its declining 20-day moving average and it looks as if last week’s rally will prove no different. Today’s drop is confirming a short-term top in GS making now an attractive time to deploy bearish plays if you’re looking to profit from continued weakness in the investment bank.

Adding insult to injury are the volume patterns in Goldman Sachs of late. High volume down days (aka distribution days) litter the landscape over the past month showing persistent aggression by sellers.

GS stock

Source: OptionsAnalytix

The Goldman Sachs Option Trade

Sell the Feb $195/$200 call spread for 72 cents or better. The max reward is limited to the initial 72-cent credit and will be captured if GS sits below $195 at February expiration. The options board is pricing-in an 80% chance that GS will be below the $195 level, so consider that your probability of profit.

The max risk is limited to the distance between strikes minus the initial credit, or $4.28, and will be lost if Goldman Sachs rises above $200 by expiration.

The asymmetric risk-reward inherent with bear call spreads often deters new option traders from using them. However, don’t be too hasty in casting judgement. In exchange for the lopsided risk-reward payout, you’re receiving a very high probability of profit.

By risking $4.28 to capture 72 cents the potential return on investment stands at 17%. So think of it this way: you have an 80% probability of capturing a 17% return over the coming two months.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/bank-profits-goldman-sachs-gs-weakness/.

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