Goldman Sachs (GS) Q2 Earnings Preview

by Dan July 18, 2016 12:13 pm • Commentary• Trade Ideas

Event: Goldman Sachs (GS) reports Q2 results tomorrow before the open. The options market is implying about a 2.5% one day post earnings move which is a tad high of the 4 quarter average one day post earnings move of about 2%.  

Price Action / Technicals: GS has shown poor relative strength to the broad market, down nearly 10% in 2016 vs the S&P 500 up 6%, which is at all time highs, vs GS down 25% from its 52 week and post financial crisis highs.

Since its early January breakdown at $170, the stock has been range-bound, having been rejected in April at $170, and made an apparent double bottom at $140:

[caption id="attachment_65087" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

I think it is safe to say that the stock’s 17% rally in almost a straight line from its post Brexit lows may discount a bit of good news in tomorrow’s results.

The chart since the start of 2011 shows just how important the bounce off of $140 was, but also the possibility of a near term rejection at the downtrend from the highs, which could cause a third test of key support:

[caption id="attachment_65088" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Implied Volatility Snapshot:  Short dated options prices are cheap, with 30 day at the money implied volatility at about 22%, well below 90 & 180 day realized volatility of ~29%:

[caption id="attachment_65089" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

So what’s the trade?

If I were inclined to play for a second half breakout to the upside, I might sell the move this week and look out to October expiration (which will catch Q3 results) and play via a call calendar.

Withe stock at $163.75, you could sell the July weekly 167.50 call at $1 and buy to open the Oct 165 call for $6.35, resulting in a net debit of $5.35. The idea for this trade would be that the stock does not have a big move, the weekly call expires worthless and you have helped to finance the Oct call that you are long. At that point depending where the stock is you could turn into a calendar again, or turn into a vertical call spread, like selling the Oct 180 call. There is a risk of a gap higher on earnings which could turn this into a short delta trade above 168.50. So for those not looking to finance in the near term but simply playing for a move higher a straight call spread like the 165/180 may make more sense.

This trade structure is called a diagonal call calendar.