GS Trade Update

by Dan May 9, 2011 2:09 pm • Commentary

Last week on May 2nd I gave my quick take on GS at current levels (read here).  Stock continues to act very poorly in a down market like last week, but on a day like today when the SPX is up 40 bps, the stock in the red, down 50 bps sticks out like a sore thumb.  Not to mention the break below key support at 150.

GS 1 Yr chart Provided by Bloomberg

MY VIEW: I want to press this short here. I think stock likely to make a decisive move one way or the other and soon.  Price action is very contrary to the fundamentals and my sense is that the selling pressure is anticipation of news or just a typical liquidation.  Since the stock made 52 week highs in January the stock has made a series of lower highs and lower lows….each of the three sell offs in the channel this year were equal to ~9% on average only then met with a rally of only 5%.   As stated above I think this will resolve itself soon, I want to be careful not overspend to express this view……Implied vol is expensive, with at the money offered at almost 22, while the 30 day realized is only about 14.50 and the 60 day realized at about 17.50. Pressing shorts can be a risky business. That’s why I’m not going to risk a ton on it.

TRADE:  GS (stock 149.43) BUY the May 145 / 140 Put Spread for ~60

-Buy May 145 Put for .88 and

-Sell May 140 Put at .28

Break-Even on May Expiration:

Upside: stock btwn 145 and 144.40 lose up to .60…Worst case stock 145 or higher and you lose .60 (or less than half of 1% of the underlying)

Downside: Stock btwn 144.40 (down ~3.3%) and 140 (down ~6%) you can make up to 4.40 or 3% of the underlying.