New Trade: Goldman Sachs (GS): Easy Money Has Been Made, Consider Stock Replacement or Low Premium Bullish Position

by Dan February 17, 2012 3:39 pm • Commentary

Here’s a preview of what I’ll be discussing tonight on Options Action


GS ($115)

Goldman Sachs (GS) is up 27% year to date as the banking sector has seen strength with some of the easing of fear about the European situation and some of the positive economic numbers we’ve been seeing here in the U.S. However, the easy money has probably been made at this point. I want to consider stock replacement for those that are long the stock in their portfolio, or a cheap outright bullish bet in the case that the market continues higher, but defines my risk as I don’t want to have a ton of long exposure in a market making new multi-year highs.

Here’s the trade:

BUY APRIL 120/130/140 Call Butterfly for 1.80

-Buy 1 April 120 Call for 4.00

-Sell 2 April 130 Calls at 2.60 (1.30 Each)

-Buy 1 April 140 Call for .40


Break-even on April Expiration:

Profits of up to 8.20 btwn 121.80 and 130.00, pay off trails off btwn 130 and 138.20

Losses up to 1.80 btwn 120 and 121.80 and btwn 138.20 and 140, max loss of 1.80 below 120 and above 140


Using April options I’m capturing an earnings cycle that could be important in the stock. Right now the skew in the options to the upside is fairly flat so the two options I’m selling gives a decent premium hedge to the long premium in the call below. This trade has a good amount of time to play out and the reason I like it is that if the market does have a pullback off the highs in the short term, which is very likely at this point, this trade gives you long exposure without a ton of damage on a pullback. That’s why it makes sense as both a low risk bullish bet as well as a sock replacement strategy in a long portfolio as protection against any near term pullback.