The market continues to baffle many traders and investors, as most downturns have been thwarted with subsequent moves higher over the last several months. At this point, it seems like the market will never move lower again.
Of course, that is impossible and a move lower will come in the future. But like the market, many stocks have been able to move higher after moving lower, like Netflix, Inc. (NASDAQ:NFLX), or gapped higher and kept moving in that direction like Caterpillar Inc. (NYSE:CAT).
Goldman Sachs Group Inc (NYSE:GS) has been struggling to move higher since the beginning of March when it started its descent. Quarterly earnings did the stock no favors, as the stock continued to decline.
Enter a bullish week like we are having and suddenly the bleeding is over, at least for now.
Possibly adding to the excitement is an increased dividend. Brian Bollinger just wrote about how Goldman Sachs hiked its dividend. The financial giant announced an increase from 65 cents to 75 cents per quarter. So maybe that’s is another reason the stock has moved higher this week.
An Options Strategy to Consider on GS Stock
The Rationale: Selling a vertical put credit spread that is out-of-the money allows an options trader to profit in three out four directions. Preferably the stock moves higher or trades sideways, but this option strategy can still earn maximum profits with a move lower to the sold strike price at expiration. This is one of the things I love about options — being able to profit in more than one direction.
Taking a look at the GS stock chart, it recently broke through a downward-sloping trendline that might have been acting as resistance and keeping the stock from moving lower. Monday and Tuesday sessions shows the stock “breaking” resistance and closing above the previous trendline.
Click to Enlarge For this trade to be successful, that previous resistance area needs to act as support just in case GS stock moves lower again. If the stock trades sideways or moves higher, this will be a moot point as the options will expire worthless. Consider it to be a bearish sign if Goldman Sachs closes below the $220 level yet again.
The Trade: Sell the May $220 put and buy the May $215 put for a credit of 70 cents or more.
The Strategy: The maximum potential profit for this trade is 70 cents if GS stock is trading at or above $220 at May expiration. Both put options would expire worthless. The maximum loss is $4.30 ($5 – 70 cents). This would occur if GS is trading at or below $215 at May expiration. Breakeven is $219.30 at expiration.
As we have discussed previously, why would an options trader risk way more than they are willing to make? The reason is the odds. With the current delta of the short put at the time of this writing at around 0.27, many option traders will say the option has an 27% chance of expiring in-the-money (ITM). That means based on the “option trader’s definition” of delta there is an 73% chance of the option expiring out-of-the-money (OTM) and worthless leading to max profit. Good luck!
John Kmiecik is the head options instructor for Market Taker Mentoring, and co-author of the eBook 3 Secrets to Making Money in Any Market. Get your complimentary copy of his option trading eBook here. He can be reached at john@markettaker.com. At the time of this writing, he did not own a position in any of the aforementioned securities.
