Goldman Sachs (GS): Just Bought a Rare Vampire Squid Put Butterfly Into Next Week’s Earnings

by Dan October 13, 2011 10:29 am • Commentary

Much like the JPM trade that I put on yesterday in front of this mornings earnings, GS holds a special place in many investors hearts’ as a lean towards “best of breed” in the financial sector.  For JPM and GS’s part these are very well run businesses with the best and the brightest of the banking world filling much of their ranks (well, at least at GS).  All of those pleasantries certainly don’t make the stocks immune to the sort of overly negative sentiment that their weaker competitors like C, BAC and MS have faced on a daily basis for the past 5 months.

GS is down 43% ytd and only 13% off of the 2 year intra-day low made last week at about $85.

JPM’s results and commentary so far (still waiting for the earnings call to end) only give me more confidence to press these shorts a little….But as usual I want to define my risk in a manner that offers a substantial risk reward while risking as little premium as possible…..

GS reports Q3 Tues Oct 18th before the open.  The options market is currently implying about a 5.5% move which is rich to its 4 qtr avg move of about 2.25%

Similar to JPM I want to make a near term bearish bet that the stock sells off back towards last weeks low. So here’s the trade:  

GS $95.75 Bought the Oct 90/85/80 Put Butterfly for .50

-Bought 1 of the Oct 90 Puts for 1.73

-Sold 2 of the Oct 85 Puts for a total of 1.62 (.81 each)

-Bought 1 of the Oct 80 Puts for .39

Break-Even on Oct Expiration:

Profits: btwn 89.50 and 85 make up to 4.50, at 85 make full 4.50 or 10x your money, btwn 85 and 80.50 your pay out trails off….

Loses: btwn 89.50 and 90 lose up to .50, above 90 lose all .50, btwn 80.50 and 80 lose up to .50 and below 80 lose all .50

TRADE RATIONALE:  I am simply looking for a low premium, high potential payout, defined risk way to play for a sell-off following earnings to the intra-day lows made last week.

I WOULD NOT BE NAKED SHORT THESE BANK STOCKS IN THE NEAR TERM, AS THEY ARE SEVERELY OVERSOLD AND THE LEAST BIT OF REAL GOOD NEWS WILL CAUSE A SHORT SQUEEZE OF EPIC PROPORTION.

That is why I am trying to define a technical level where I think the stock can trade, in a set period around an event…..I like the risk one make 9 pay out potential if I am right.  As always the likelihood of me keeping to expiration and nailing the point in which the stock closes and realizing the max payout inst great, but a girl can dream cant she??

If I get the direction right and the magnitude of the move close to correct I would be happy taking 3-4 x my money….and as always I will look to take off my initial premium on half of the position if and when I can.

And er usual, I always use limits on multi-leg orders.

ALSO WITH THE STOCK DOWN 3.5% THIS MORNING IN SYMPATHY WITH JPM IT MAY MAKE SENSE TO WAIT UNTIL JPM’S CALL IS OVER AND SEE HOW THE STOCK ACTS BEFORE PRESSING SHORTS…….I OF COURSE COULDN’T HELP MYSELF.

(For explanation of Vampire Squid reference, go here)