Trade Update $GS: Closing May 145/135 Put Spread for a Gain

by Dan April 17, 2013 2:32 pm • Commentary

Trade Update April 17th, 2013:  With GS down ~7.5% from its Monday morning highs prior to their Q1 earnings report, and down ~5% since I initiated  my bearish Put Spread in May expiration nearly a month ago, I am now going to take profits in the trade, despite my continued bearish stance on the sector.  Both from a fundamental and a technical level, the group remains challenged in the near term, but given the recent history of the every dip being bought in the market, I have to take what the market gives me.  I will look to re-initiate a bearish stance in the sector, most likely in a lesser quality name like MS.

Action: Sold to Close GS ($139.90)  May 145/135 Put Spread at 4.85 for a 1.85 gain




Update April 11th, 2013:  Considering Our Options – $GS May Put Spread

Almost 3 weeks ago I bought a May put spread (below) in GS in front of what I thought would be an increasingly volatile couple months for equities in general, and a seasonally tough time for banks stocks in particular.  With just a little more than 2 trading days left before GS’s Q1 earnings report (scheduled for Apr 16th pre-market) and before tomorrow morning’s highly anticipated results of JPM and WFC, I thought I would take the opportunity to update my thoughts on this trade.

Lets lay out the facts; the stock is up ~2% from where I initiated, after being down almost 5% from that point after Friday’s disappointing non farm payrolls number.  At that point for maybe an hour Friday morning the spread that I paid $3 for was probably worth $4.50.  Now with the stock up almost 7% from that point, the spread is worth around $2.00.

So what to do?  The way I see it I have a few options:

1. Worry that JPM’s results will cause a sector wide rally and either reduce the size of my position, or close it all together and avoid the potential for future loses.

2. Double down and add to the position as I have more than a month left to expiration and given the fact the SPX is at all time highs there is a fairly good likelihood that I will have some time to wiggle out of this one for no loss of possibly a gain.

3. Do Nothing, wait and see how JPM and WFC react to their results and guidance and then make my decision on how to proceed into GS’s earnings report due Tuesday.

As usual I am using technicals a bit to guide my near term decision process on how to manage the trade.  yesterday in our QnA section I suggested that if the stock closed above a fairly important near term resistance level of $150 I would be inclined to close half of the position, and I think that is the right course for the moment.

If bank earnings are better than expected, and the stocks which had apparently lost some momentum of late (most topping out in Feb/March) were to regain that momentum based on forward guidance that I would be forced to throw in the towel.  Tomorrow’s price action should serve as a decent guide, and at this point I think it makes sense to give it another day.

Implied Vol is elevated recently but not super high. There is risk that the financials that report beforehand give the market a good sense of where things are and that IV could be at risk of going lower before GS reports. Weakness in the sector following the first few reports could keep it relatively elevated.

I’m going to take a wait-and-see approach for now and will re-assess after tomorrow morning’s results.



Original Post March 22nd, 2013:   New Trade $GS: Hope Springs Eternal For U.S. Banks

Here is a summary of what I will be discussing tonight on Options Action on CNBC at 5:30pm:

Ok I get it, Euro Bank/Debt Contagion fears are SO 2011/2012, but my sense if the last 2 spring/summer serve as a decent point of reference it may be worth U.S. investors time to think hard about the short term pain felt on this side of the Atlantic.  In the spring of 2011, it was Euro Debt fears that caused the initial 10% decline from 52 week highs in the SPX, and then our own little shenanigans added the second 10% decline……Then again in the spring of 2012 a 10% peak to trough decline as Euro Debt fears reared their ugly head again.  The SPX seems destined to have one of its best Q1 closes in the last 20 years, but what could possibly be the spoiler in Q2??

As we head into the Spring and Cyprus is the disaster of the season, I want to identify a few reasons why I think U.S. banks could be vulnerable in the coming months and single out one name, GS to express a near term bearish view:

  1. European Stress.  Enis’ CotD post detailed the divergence between European banks and U.S. banks.  European banks are signaling that the problems in the periphery might be more serious than just a blip on the radar in the healing process.  While the focus is on Cyprus, Italy has yet to form a government.
  2. Stress Tests.  The Federal Reserve singled out GS and JPM for their lax risk management processes, though did not reject their capital plans.  However, this increased scrutiny is likely going to make the hard-charging traders at GS think twice about swinging for the fences, and is an overhang that could reduce risk-taking appetite overall.
  3. Strong Q4 Earnings Raised Expectations.  GS reported a very strong Q4 number, and the stock gapped higher and didn’t look back, rallying for practically a month straight, from the middle of Jan to the middle of Feb.  However, GS earnings have been notably volatile for the past 5 years, so optimistic earnings expectations for 2013 based on one strong quarter could be a setup for disappointment.

Looking at the technicals, in the past 3 years, breaks of the 50-day moving average after multi-month uptrends have generally signaled forthcoming weakness in the stock.  Those previous instances are circled in red below:

3 year daily chart of GS, Courtesy of Bloomberg
3 year daily chart of GS, Courtesy of Bloomberg

From a vol perspective, options buying is compelling because GS is one of the few stocks in the current quiet market where implied vol is actually below recent realized vol.  Here is the 30 day IV (red) vs. 30 day RV (blue) chart, Courtesy of LiveVolPro:

Screen Shot 2013-03-22 at 1.58.01 PM


Add to this picture the fact that the next earnings report in GS falls before Apr expiry, and 1-2 month options look priced too cheap in the name.  I wan to be clear about this, I am not pounding the table, and suggesting the sky is falling, but if we do see the slightest bit of uptick in the recent developments in Europe, we could have a redux of the past few springs.

TRADE: GS ($146.80) Bought the May 145/135 Put Spread for 3.00

-Bought 1 May 145 Put for 5.00

-Sold 1 May 135 Put at 2.00

Break-Even on May Expiration:

Profits: btwn 142 and 135 make up to 7, max gain of 7.00 below 135.

Losses: of up to 3.00 btwn 142 and 145, max loss of 3.00 above 145.