On a day that it is announced that the President-elect will nominate Goldman Sachs (GS) alum Steve Mnuchin to head the Treasury, and is considering with GS’s current COO for a senior role in the administration, shares of the stock are trading at levels not seen since early 2008, and just 12% from its all time highs made in late 2007:[caption id="attachment_68514" align="aligncenter" width="600"] GS 10yr chart from Bloomberg[/caption]
In the near term, it’s hard to argue how GS will not make a run back to those prior highs as positive sentiment for bank stocks should continue given the sector friendly cabinet /administration picks, expectations for a rate increase in two weeks and the potential for de-regulation. GS’s 60% gains from its 52 week lows in early July might possibly discount much of this news, with half of the gains coming merely since the the election.
On a near term basis, if I were to target a pullback in the stock, $210 is the near term target as it was the consolidation before today’s breakout, and below that is $200, which looks like a nice round number, also the November 2015 high which might serve as mild support:[caption id="attachment_68515" align="aligncenter" width="600"] GS 2yr chart from Bloomberg[/caption]
Short dated options prices are relatively cheap, with 30 day at the money implied volatility at 22%, well below the 2016 average of about 27%, making long premium directional bets remotely attractive, expect for the fact that we might go into a very low vol period into the holidays:[caption id="attachment_68516" align="aligncenter" width="600"] from Bloomberg[/caption]
So what’s the trade?
We want to finance puts for a move back to 200 in January by selling at near term support ($205ish) to end the year:
*GS ($218.70) Buy Dec 30th / Jan 20th 205 put calendar for $1.30
- Sell 1 Dec 30th 205 put at $1.65
- Buy 1 Jan 20th 205 put for $2.95
Break-Even on Dec 30th expiration:
The ideal situation is with the stock at or near 205 on Dec30th expiration. In that case the Dec30th short puts can be closed and rolled lower in January creating a cheap put spread that could capture any early 2017 pullback. The most that can be lost on the trade is 1.35. If the stock continues its march higher into year end a stop of 50% of premium spent (~.70) can keep the damage at at a minimum. If the stock declines towards 210 the trade can either be closed for a profit before Dec30th or turned into a straight vertical to play for a break below 205 in January.