The ol’ buy-the-rumor, sell-the-news phenomenon is on full display in Goldman Sachs Group Inc (NYSE:GS) following Thursday’s earnings release.
Despite reporting blowout numbers for its first quarter earnings, all GS stock was able to muster was a puny 0.7% up gap, which was immediately sold into. It got worse Friday, as Goldman actually sold off more than 1% at the bell.
The investment bank earned $5.94 per share besting analysts’ estimates of $4.26 per share. The impressive quarter marked one of Goldman Sachs’ best showing in years.
But rather than getting the Netflix, Inc. (NASDAQ:NFLX) treatment and being rewarded with monster gains — NFLX stock soared 18% following earnings — GS stock was greeted with a groundswell of sell orders.
Although shares were down as much as 2% from the opening gap, they rallied back a touch ending the day down an uninspiring 1.2%.
Perhaps the good news was already priced in the stock. That would be the “buy the rumor” part of the phrase. Since its mid-March pivot around $185, shares of GS were up 8.6% heading into earnings — a respectable run for a mild-mannered bank stock like Goldman Sachs.
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Play the GS Fade with Call Spreads
If you think GS stock has gotten a bit too hot to trot, and the post-earnings reaction is signaling additional profit taking may be in store, consider selling May bear call spreads.
By using out-of-the-money options, we can structure the trade to profit provided GS doesn’t rise much further from current levels.
Sell the May $205/$210 call spread for $1.10 credit. The max reward is limited to the initial $1.10 credit and will be captured if GS sits below $205 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $3.90, and will be lost if GS stock rises above $210.
As of this writing, Tyler Craig did not have a position in any of the aforementioned securities.
