Goldman Sachs (GS) – Squidishw

by riskreversal January 10, 2017 12:40 pm • Trade Ideas

This morning Citibank’s bank analyst Keith Horowitz downgraded his rating on Goldman Sachs (GS) from Neutral to Sell slapping a $225 price target on the stock, per

“We view the banks as trading stocks and following the recent run, we don’t really see a compelling risk/reward for the group, While we do not think the group is significantly overvalued, we wanted to address investor questions about which stocks have overshot the most,” analyst Keith Horowitz wrote in a note to clients Tuesday. “Based on our work, we see near-term tactical opportunities to trim positions in … GS.”

This is Horowitz’ second downgrade of GS in just two months ago prior to the presidential election results on Nov 8th, per Bloomberg:

2 “main risks” around stocks: Political risk heading into election and interest rate risk; doesn’t like risk/reward on political side

Sees “status quo,” with Hillary Clinton victory, Republican-controlled Senate as best case scenario; sees potential downside with Donald Trump victory (with uncertainty around policy implications) or Clinton win plus Democrat-controlled Senate, particularly for banks in latter case, amid renewed fears about increased regulation

In the business we call this doubling down. GS is up 31% since Nov 8th.

GS is expected to report Q4 results next week (not confirmed but expected Jan 18th). The options market is implying about a 3.3% one day post earnings move in either direction, which is obviously rich to the 4 qtr one day average post earnings move of 1.65%, but essentially inline with the 10 year average of about 3%.

With GS at $240 the Jan 20th 240 straddle (the call premium + the put premium) is offered at $10, if you bought that and thus the implied move between now and next Friday’s close, you would need a rally above $250, or a decline below $230 to make money, or about 4% (most of which is being priced for the earnings event).

Expectations are obviously high for GS, based on the belief that higher rates, less regulation, tax reform and greater economic growth would all benefit GS’s business. But no reason for the stock’s recent rally has been more important than having friends in high places. GS alumni are expected to be approved to head the Treasury and be chair of the National Economic Council. Your guess is as good as mine if GS’s 31% gains since the election discounts all of the above.  To my eye, the mid point of the $60 pop higher seems like a downside target if there was a sharp decline, with 220 just above both the current 50 day moving average and the high from Summer of 2015. But I can’t conceive of a reason why that would happen in the coming weeks/months:

GS 1yr chart from Bloomberg

On the flip-side, I am hard-pressed to think GS has come this far not to out put in a new all time high. That all time high was in late 2007, near $250:

GS 10 year chart from Bloomberg

So What’s the Trade?

Whether Goldman puts in a new high or not the stock is already extended near term. How that resolves itself is unclear. But for those long the stock and looking to hedge, or those downright bearish, this pause and consolidation may offer a good opportunity to play or protect against the first pullback since the election.

Hedge against 100 shares of existing stock

GS (242) Buy the 225/200 put spread, 260 call collar for even money
  • Sell 1 Feb 260 call at 2.30
  • Buy 1 Feb 225 put for 2.70
  • Sell 1 Feb 200 put at .40

Rationale – This hedge vs long stock caps profits on the upside at 260 which is outside the implied earnings move. On the downside you get $25 of protection from 225 down to 200, below 200 there is so protection but that is an extremely unlikely event. In most cases the stock will be between 225 and 260 and nothing changes, you simply have the profits and loss that comes with the stock, but you’ve essentially locked in profits at 225 if you own the stock from lower and you have placed a sell order at 260 in case of a pop on earnings. That’s 7.5% higher in the stock.

Outright Bearish/ or hedge

GS (242) Buy the Jan 230/215 spread for 1.00
  • Buy 1 Jan 230 put for 1.25
  • Sell 1 Jan 215 put at .25

Rationale – This simple put spread risks 1.00 to make up to 14.00 on a decline back to a 50% retracement of the recent parabolic. As an outright bearish it offers decent risk reward without risking a ton of money. As a hedge it provides up to 14 dollars in protection for less than half a percent of the underlying.