Trade Update Goldman Sachs (GS): Managing A Winning Call Butterfly

by Dan March 22, 2012 3:05 pm • Commentary

Trade Update March 22nd 2012:  A little more than a month ago I suggested that the easy money might have been made in some of the Banks, and was obviously a bit early on that, but now I really mean it!  GS is up about 8% since putting on a Apr 120/130/140 Call Fly for 1.80 on Feb 17th.   With the stock now at $124.75, this Fly that I Bought for 1.80 can now be sold for about 3.00, a 1.20 gain.   As many readers know I have been a bit skeptical of the breadth of this rally and would very much like to see a healthy pullback that re-traces 30-50% of this years gains….I think this is coming soon.

I am taking profits in some long plays where I have them and will look to re-enter at lower levels.  GS is up almost 28% ytd and with Q1 earnings a few weeks (April 17th pre-open) away we could see some profit taking ahead of the print.  I think there is a very good chance banks like GS print better than decent Q1 results and guide decently which should be a positive for the sector, but would be a lot more positive if the stocks took a little pause first.


Original Post Feb 17th, 2012:

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.