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Goldman Sachs (GS)- A Potentially Profitable Opportunity

Published on May 3, 2010

Goldman Sachs (GS)- A Potentially Profitable Opportunity

May 3, 2010

Goldman Sachs (GS) is down $40 since April 16th; How much more it has to lose? Anybody’s guess is probably better than mine. Regardless of whatever I think, I guess they are too big, powerful and connected to go under.

With that bullish bias, here is a trade idea that potentially can deliver excellent results on upside. But wait a min, what if I am wrong? It can still make some gains on downside as long as GS is either above $159.4 or below $130.6 by June expiration. Pls don’t read any further if you think GS will remain in between these strikes by June expiration and/or if you can’t adjust the trade for risk/profits beforehand.

Before you read further, I suggest reading about backspread so you are familiar with this wonderful strategy.

(If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is via invitation only)

Here is the trade idea-

  • Buy to open a ratio spread: +2 Jun 145 Call, AND -1 June 130 Call, Debit $53, Margin $1,500
  • Sell to open: June 170/180 Bear Call Vertical Spread (Sell June 170 Call and Buy June 180 Call), Credit $1, Margin $1,000

Total cost of the trade =$1,443, Attached is the risk reward curve for this spread. As you might notice, this I designed with a bullish bias, but even if the stock drops below $130 by June expiration this trade will make money.

GS BackspreadBut before you get too excited and jump into transactions, pls read on how this trade can lose money?

This trade will lose money in the following scenarios-

  1. If the stock stays in a sideways movement, trading in a narrow range and the trade is not adjusted before June expiration, this will lose money.
  2. This is a theta negative trade; thus time is erasing value from this trade every day. This is also vega negative trade, which means, any drop in IV will affect the daily value, but the expiration value won’t change i.e. breakeven for the expiration will remain the same.
  3. If the stock drops sharply, this trade will lose money as this is delta positive. But the breakeven will remain the same as listed in point 2.

How will this trade make money– This is positive delta trade, any sharp movement upwards will “potentially” bring more $$ then IV and theta can take away. The key here is the June expiration i.e. for this trade to make excellent money GS has to be beyond breakeven points by June expiration or sharply bounce from the current daily oversold state so this can be close for profits.

Watch out– This initial cash out lay is $1,443; don’t do this trade if you can’t sleep well by losing 100% of this amount. This is a special opportunity trade, with the sole objective of making a 15-20% return, and to close it. Or take the loss (whatever you are comfortable with) and move on.

Disclaimer– As of this writing, I am not in this trade. I intend to get into this when markets open on Monday but depending upon GS’s move, I might change the strikes. Pls do your due diligence before investing any $$ in this trade.

If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

Profitable Trading, OP

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