GS is down 4.5% this morning partially due to a downgrade to SELL by influential bank analyst Dick Bove from not so influential Rochdale Securities. I have been leaning on the short GS trade for some time, not because I think there is anything wrong there, I actually think it is a very fine company, who continues to be in the throws of a bad populist PR mess that reaches from the peeps out there, fueled by the media and piled on by the feds.
-Since Monday’s post the stock is down 6.5% and I am taking off my put spread that I paid .60 for, and selling at ~2.70 as the stock has gone to my target of ~140…. gonna take the money and run!
ORIGINAL POST May 9, 2011:
Monday 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.[caption id="attachment_1626" align="aligncenter" width="300" caption="GS 1 Yr chart Provided by Bloomberg"][/caption]
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.
ORIGINAL POST May 2, 2011:
As most readers of the his space know I was particularly skeptical of bank stocks heading into earnings season. While most names posted decent results for Q1, the stocks acted, and continue to act horribly, even as the SPX makes new multi-year highs. There was just one little problem with the results and outlook, loan growth or lack there of. While most banks displayed strong investment banking results, and others solid trading results, many investors focused on paltry demand for commercial loans, and obviously arrived at the conclusion that without such demand, top line growth for many banks will be hard to come by anytime soon.
–Goldman Sachs sticks out like a sore thumb to me in this current market environment (euphoric.) The Stock cant get out of its own way and sits on a precarious 2 year support level.
-Chart below shows GS’s (red line) massive under-performance to the SPX (yellow line)….
-The company has had it’s share of issues over the past 12 months (dating back to last April’s SEC investigation, to a director’s involvement in a large insider trading case, to the EU’s most recent investigation into the swaps market) none of which have anything to do with the company’s stellar operating performance over the same period……The company, fairly or unfairly, has been used as the press and government’s pinata, if you will since the end of the financial crisis. (one such guy in particular has the proverbial high hard one for them, read here, while many of you have read this, I add for the purpose of solid bathroom reading)…..Personally I think they just need a new PR firm….. But as an investor/trader one can’t ignore the very bad price action and one needs to proceed with caution.
A TALE OF TWO CITIES
-Flip Side of this has been the glorious run that JPM has had since really the sweetheart deal the company struck with the Feds to “save” Bear Stearns in March 2008. The company, and their CEO (the western world’s savior of capitalism or socialism or whatever….) Jamie Dimon have faced little to none of the same criticisms that its less fortunate peers have been subjected too….
-The stock has enjoyed unusual relative strength to its large cap banking peers….and all signs point to this continued strength, BUT I WOULD ARGUE THAT IF THIS MARKET RALLY IS GOING TO CONTINUE, THEN IT WILL NEED TO BROADEN OUT A BIT FROM ENERGY/COMMODITY RELATED NAMES, TECH AND INDUSTRIALS………FINANCIAL STOCKS WILL NEED TO PARTICIPATE AND LIKELY FUEL THE NEXT LEG OF THE RALLY, IF THERE IS ONE…….
A COUPLE OF GS TRADES I AM CONSIDERING:
-As many readers know I am not a huge fan of the market at these levels but also recognize that their may be an opportunity to play some catch up with some of the laggards if the market has legs…..While GS acts particularly bad at the moment, if there was ever a reason to cause shorts to cover and longs to add to already nervous positions, the stock could make a very quick move back to 160.
-The Jury is still out on this one though, and you will have to make your own decision here. I am waiting to see if GS holds the 150 level, that support level goes back almost 2 years….a meaningful breach of that level could see the stock back at 140 in a quick. But If you are inclined to think that if the market will need a stock like GS to participate in the rally for it to continue, then this structure could be a good alternative to buying the stock at current levels. Below I will offer 3 different trade structures, and depending upon your own point of view on the name, on the markets, my assessment, your portfolio holdings and most importantly your risk tolerance you may find them to be cost affective ways to express such a view….I am waiting to see how the market and the financials trade as we get further away from the FED and earnings and will either look to play GS for a Bounce or further press the short…..
1st TRADE EXAMPLE – EXPRESS NEAR TERM CONTRARIAN BULLISH VIEW IN GS…
-GS (stock 151) Sell the June 140 Put to Buy the June 155 / 160 Call Spread–Package costs about .20
-Sell the June 140 Put at ~1.20
-Buy the June 155 Call for ~2.60
-Sell the June 160 call at ~1.20
Break-Evens on June Expiration:
Upside: btwn 155 and 155.2o lose up to .20, btwn 155.20 (up ~2.75%) and 160 (up ~6%) make up to 4.80..
Best Case: stock is 160 or higher and make full 4.80 or ~3.25% in 3 weeks.
Downside: stock btwn 155 and 140 lows .20 premium you paid for structure.
Worst Case: stock is 140 (down ~7.25%) or lower and you are put the stock at 140 and suffer loses below and you lose the .20 in premium.
2nd TRADE EXAMPLE.…PRESS THE GS SHORT, AS YOU FEEL THE MARKET IS TOPPY AND GS ACTS THIS WAY FOR A REASON AND YOU WANT TO PLAY FOR THAT BREAK BELOW 150 TOWARDS THE 52 WEEK LOWS.
GS (stock 151) Buy the July 140/130 1×2 Put Spread for ~.55
-Buy 1 July 140 Put for 2.20 and
-Sell 2 of the July 130 Puts for a total of 1.65 (or .83 each)
Break-Even on July Expiration:
Upside: stock above 140 lose all of the .55 premium paid for the structure.
Downside: btwn 139.45 and 140 lose up to .55, btwn 139.45 (down 7.5%) and 130 (down ~14%) make up to 9.45.
Best Case: stock 130 and make full 9.45.
Worse to Worst Case: Btwn 130 and 120 the payout trails off but you don’t really lose money till 120.55 (down 20%)…..you are put the stock at 130, but you have made 10 long the 140 Put, so less the premium that you paid your worst case break-even is 120.55.
-2 Year Chart showing massive support level at 150. A break below this level could see the stock back at 140 near term.
TRADE RATIONALE: This structure could be used as an outright bearish bet or for those for longs who may want a little breakdown protection and not pay a lot of premium for it. As far as evaluating this structure to make a bearish bet it is clearly a lower probability play, and you need a fairly sizable move to make money on expiration. Wanted to look for low premium ways to express this view…..likelihood of stock being down 20% by July expiration is not great, but for those worried above selling tales you may consider Put Butterfly’s (buying the July 120 Put for ~.38. this way you are covered and could only lose the ~.92 that you paid for the structure).
3rd STRUCTURE TO BE USED AGAINST A LONG-DEFENSIVE, IF THE PRICE ACTION MAKES YOU A BIT NERVOUS AND YOU WANT TO PROTECT YOUR LONG BUT DON’T EXACTLY WANT TO SELL CONSIDER PUT SPREAD COLLARS.
GS (stock 151) Sell the July 165 Call to Buy the July 145 / 135 Put Spread..Package costs ~1.00
-Sell the July 165 Call at 1.10
-Buy the July 145 Put for 3.45
-Sell the July 135 Put at 1.35
Break-Even on July Expiration:
Upside: enjoy gains in the stock from 152 (current level less the 1.00 you paid for the structure) to 165 (up 9.25%) where your stock would be called away.
Downside: stock btwn 151 and 144 (put strike you are long less the 1.00 in premium that you paid) and 135 (down 10.5%) your long is protected, BELOW 135 you have no protection but you have mitigated 9.00 of downside….
TRADE STRUCTURE RATIONALE: if you are long GS you presumably own it for a reason, and given the stocks under-performance for the last few months you presumably have a reason for not selling it either….A structure like this helps make the decision of parting with your stock a little easier by still giving you the potential to make back some lost ground while offering some near the money protection…..My advice is to use a structure like this around a core holding in you portfolio in a tactical manner. For instance right now GS acts very poorly relative to some of its peers like JPM and in particular to the S&P500……who knows why, but as stated above it is sitting on long term support and you may want to look to be a little defensive to protect capital….