by John Kmiecik | December 19, 2013 8:35 am
A lot of traders are breathing a sigh of relief after the recent FOMC meeting. With the pending volatility that the announcement can bring, more than a few traders were waiting to put on any new positions. However, now that the event is over, it might be time to jump back into the market. Here is a trade idea on Goldman Sachs (GS), which benefited from the announcement and might have plans to move even higher.
The trade: Buy the GS Jan 175 calls for $4.45 or less.
The strategy: A long call option strategy is generally implemented when a trader has a bullish forecast. The trade can profit if the stock moves higher and the call premium increases to an amount more than was paid. Maximum profit is theoretically unlimited because GS stock can continue to rise, and the maximum loss is $4.45 or whatever was paid for the option if GS stock finishes below $175 at January expiration. Breakeven is $179.45 at expiration based on a cost of $4.45.
The rationale: Goldman Sachs provides financial services to corporations, financial institutions and individuals globally. The banking giant has increased its bottom line significantly, from $4.41 per share to $14.15 in the most recent fiscal year. GS stock is up about 35% since the beginning of the year.
The Fed’s announcement Wednesday that it will taper $10 billion in bond buying, and its pledge to keep the Fed funds rate near its current levels — even as the unemployment rate declines — might help GS stock in the near future. A clear direction (at least for now) about where interest rates are heading may encourage bond buyers to become more active. Trading revenue recently fell for Goldman Sachs, and fixed-income trading was a big part of the downturn.
Click to Enlarge Taking a look at the chart, it becomes pretty clear that the $170 area has held GS stock back for several months. It tested the level several times and was unable to close above $170 even once.
That was true until this week, when GS stock made a determined move through that level. Prior to the move, shares had been grinding higher and formed a bullish base just below the $170 area. Since GS stock was not extended before the breakout, the move higher might not be a temporary thing.
Shares could face a bit of resistance from a prior high around $175 from January 2011, but if they make it past that level, GS stock could head to the $180 level.
Sometimes it just makes sense to ride the hot hand!
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.
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