Today’s news that the SEC has brought civil fraud charges against Goldman Sachs (GS) is one of those issues that at this point could go either way. The implications are many, and the various outcomes are just as varied. Some could liken this situation to a mosquito bite — irritating and uncomfortable, but it will go away — while others could argue that this will be a game-changer for Goldman.
The stock was down over 12% today, which is huge when you consider just how active GS stock options have been and just how active the stock is. At approximately $161, its 52-week trading range is $113.38 to $193.60, but you have to go back even further to get a sense for what the real pain looked like during the financial panic of late 2008 to early 2009. In the months when the market was worried that even the strong companies would die, shares of Goldman Sachs briefly plunged to below $50, and for five months shares were under $100.
So what is the best way to look at this on an outlier basis? The outlier trade is not that Goldman gets off scot-free. An outlier bet is that this is being magnified as retribution from Washington, D.C. and that the goal is to kill this “too big to fail” institution. Again, it’s too soon to come to that conclusion based upon the first day of news. But if you’re looking for an outlier trade, here it is.
First, you need time. Summer won’t cut it. Trials, settlements and arbitration can be delayed and delayed. And the reports are going to be coming for weeks and months, so the soonest we would execute the puts is October. After running the matrix on a snapshot for the highest implied rewards versus the least premium risk, the OCT10 $130 PUTS and a $5.50 premium seem to offer a blend of the highest reward versus premiums paid.
To give more time for this outlier to play out, you can push this out to January 2011 for the same price by going with the JAN11 $115 PUTS at $5.50.
As with all outliers, the idea is to maximize gains with the lowest premium possible that still actually has a chance of happening if your directional assumption comes true.
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