Name That Trade – $GS: Vampire Lid?

by Enis July 15, 2014 11:16 am • Commentary

Goldman Sachs reported a better than expected result this morning, and the stock is trading 1.5% higher early in the session.  While the trading businesses (both fixed income and equities) were weak, down 11% year-over-year, that weakness was offset by strength in investment banking, investment management, and positions on the firm’s own balance sheet.  Here was Lloyd Blankfein’s brief summary of the results:

“We are pleased with our results for the quarter in the context of mixed operating conditions during the period,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer. “This performance was driven by the diversity, strength and breadth of our global client franchise. Good client activity in Investment Banking and Investment Management as well as a better environment for our Investing & Lending activities helped offset less favorable conditions for Institutional Client Services.”

The overall EPS number beat by more than 30%, as GS reported $4.10 in EPS vs. analysts’ expectation of $3.03 a share.  However, GS is only up 1.5% after the earnings result, a timid reaction given the strong beat.  

A major reason why investors are not too excited by the underlying result is that Goldman’s bread and butter business over the past decade has been its trading businesses.  That’s where the big profits usually come from, and that’s why the stock has struggled over the past year as volatility has remained low.  Investors realize that the other businesses are nice to have during quiet periods as an offset to trading weakness, but the only realistic way GS is going to grow earnings over the long haul is for the sales and trading desks to pick up the slack.

With that in mind, the result looks quite weak considering that bank managements have guided to a similar environment for trading in the 3rd quarter.  Moreover, GS is now at a crucial technical level of resistance near $170, which has held for the past 3 months:

[caption id="attachment_42898" align="alignnone" width="600"]GS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg GS daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

We bid on the following trade this morning, but were unable to get filled as GS stock faded quite quickly after the open.  However, we wanted to lay it out here along with the rationale in the hopes of getting filled at some point in the next week, likely if GS retests the $170 resistance level.

Hypothethical Trade – Buy to open the GS Aug22nd 172/165/157 put fly for $2.00

– Buy to open 1 Aug22 172 put

– Sell to open 2 Aug22 165 puts

– Buy to open 1 Aug22 157 put


This trade looks to take advantage of Goldman’s pop on it earnings report to fade the move with the assumption that the stock will have difficulty getting above 170 and may settle back into the middle of its range at some point in the next month. The breakevens on this trade are quite wide to play for that potential sideways action.