Since the 2016 U.S. elections, banks have been on a tear. In particular, Goldman Sachs Group Inc (NYSE:GS) finally recovered the highs from 2007. They have since given back about $25 per share, but the fundamental outlook for GS stock still is promising.
As long as President Trump is committed to loosening the regulatory strings, banks should have a shallow bottom. Furthermore, the U.S. Fed is in a tightening cycle and that also should provide support to GS stock.
I am not one to chase target prices, so I am not calling for a buy signal here. In fact, I see a technical threat where GS could lose another $15 if it fails to rebound from here. If that happens then the $200 area should provide some support since it has been pivotal and GS bulls are likely to fight for it once again.
Regardless, looking at a decade of price range it is clear that the extreme lows are not likely to return under current conditions. Today, I want to sell downside risk below proven support levels.
The idea is to create income by having my trade expire for maximum profit, so I chose levels that have been tested over ten years. Instead of chasing a price target, I will create income off someone else’s doom scenario that I deem unlikely to occur.
The Trade: Sell the GS 2018 Jan $160 put naked for $3 per contract. This trade has a 90% theoretical chance of success. If GS stock falls below my strike, I am committed to owning it at $160. Anything below $157 per share would accrue losses. Essentially, I am being paid $3 for a chance to buy Goldman stock at a 29% discount from current levels.
Selling naked puts is dangerous, however. That said, only do it if you are willing and able to own GS stock at the strike price. Alternatively, I can turn this trade into a Jan 2018 $165/$160 credit put spread. The advantage is that the spread has a finite risk profile and still yields 10% risk.
As bank earnings begin this week, Goldman Sachs is scheduled to report after other mega-banks, such as Citigroup Inc (NYSE:C), so we could get a preview of how traders will react to GS earnings.
Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
