Shares of Goldman Sachs are up nearly 35% on the year, most of it since Nov 8th, and up nearly 75% from its late June post Brexit lows, and now just 3% from its all time highs made in late 2007:
The stock’s strength can be attributed to a handful of factors, most importantly the dramatic short term rise in interest rates over the last month, but also the expectation for a far loser regulatory environment under the new administration should allow for increased profitability possibly making the stock appear cheap on a valuation basis. Lastly, with the nomination of a GS alum to head the U.S. Treasury, and talk of GS’cs current COO being considered for a senior post, the company will once again have friends in high places.
We detailed a way to try to fade that strength with a dollar cheap put calendar a little over a week ago. The stock has continued higher since then and when it shows the first sign of exhaustion we’ll look to update and possibly roll the strike higher without adding too much risk.
But for those who have been fortunate enough to ride the recent wave long the stock, and would like to take some profits but do not want to book dramatic short term gains given the expectation that the tax rate will be lower in 2017, a short term hedge makes sense for the time being.
First, I would note that short dated options prices have been rising with the stock, which is somewhat contrary to what usually occurs with stocks or indices rallying. And this is despite spot VIX at 13. Thirty day at the money implied volatility in GS is very near 30%, above the pre Q3 earnings levels in early October into what might be a quiet holiday trading period:
For those looking to buy time until 2017, you might consider collaring your stock (vs 100 shares of stock, selling 1 call and buying 1 put). Let’s walk through a couple considerations when collaring stock.
First, timing, in this situation you want to get to 2017, so you might consider Jan 6th weekly expiration.
Second, you need to consider cost. If you are willing to pay some premium or do it for no cost (call sale premium equals that of the put purchase premium).
With GS at $241.50 you might target the prior high of $250 to the upside, and look for protection below $230.
Vs 100 shares of GS at $240
- Sell to open 1 Jan 6th weekly 250 call at $4 and
- Buy to open 1 Jan 6th weekly 230 put for $4
Collar costs nothing.
Break-Even on Jan 6th expiration:
Profits of stock up to $250, the stock would be called away at $250, up 4%.
Losses of the stock down to $230, or $10, down 4%, but protected below.