Watching this market lately has not been easy especially if you are trading. Many stocks have started moving higher or lower at the open and then reversing their course as the session moves on. Here is a trade idea on a stock that hasn’t done much over the last month but that is just fine for this strategy.
The trade: Sell the Goldman Sachs (NYSE:GS) January $105/$110 put credit spread (selling the GS January $110 put and buying the GS January $105 put) for 50 cents or better.
The strategy: The maximum potential profit for this trade is 50 cents if GS is trading above $110 at January expiration. The maximum loss is $4.50 ($5 minus 50 cents) if GS is trading below $105 at January expiration. Breakeven is $109.50 at expiration based on a 50-cent credit.
The rationale: Goldman Sachs has pretty much traded between $114 and $121 for the last month. By most accounts it hasn’t been very exciting…perfect! This trade idea is really about a neutral outlook than a bullish one. If the stock continues to trade sideways or moves higher this trade will profit.
GS has two levels of support it is currently trading above: previous pivot lows around $114 back in November and a horizontal daily 200 simple moving average right around $110. If the stock decides to move lower, one or both areas of support need to keep the stock from heading lower.
Credit spreads generally can be more profitable when the implied volatility of the options are high. Unfortunately that is not the case for most stocks, including GS, as the implied volatility has remained relatively low. But the key to being successful as a trader is being able to recognize a pattern and applying the correct strategy to profit from your outlook. Selling this put spread may not be perfect, but in more ways than one it sure looks good.
John Kmiecik did not hold a position in GS at the time of this writing.