Bank stocks have been one of our focuses in the New Year. It was our view that into their earnings, sentiment had gotten so good that a continuation of the bullish run would be difficult for most if not all of these stocks. We’ve gotten results from some of the big boys and most have given up any post earnings moves to the upside and are now leading the broader market a bit lower. We looked at Goldman Sachs on January 10th as it seemed to be the stock with the most out of the park sentiment shift since the election as several Goldman alums had been appointed to cabinet positions in the new administration (Steve Mnuchin is on the Hill today for confirmation hearings). The policy assumptions being made probably got a little ahead of reality and the direct connections to Goldman from people that haven’t worked there in years probably exaggerated. Either way, the big banks probably went to far too fast, Goldman in particular and . We detailed two trade ideas, one for long holders, and one for those looking for bearish positioning outright. Here were those trade ideas:
Hedge against 100 shares of existing stock
GS (242) Buy the Feb 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
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
GS has retreated from its highs following their earnings and the stock is now approaching possible support at its 50 day moving average ($226):
With the stock 231.40, the hedge, which was even money at the time of entry is worth about $3.00. That’s softened the blow a little bit. But the key to this trade is that it’s looking out to February and the real protection is if the stock breaks below its support. From 225 to 200 the stock is completely protected. As far as trade management, there’s not much to be done, perhaps covering the short calls soon makes sense (they are around .35 now). They could be laid back out for more (or a lower strike the 250’s) if the stock were to bounce after, but for now, not much needs to be done as this is for protection.
As far as the outright bearish put spread, that expires tomorrow and it’s currently worth about .75 vs the 1.00 paid. However, it could be worth a lot more if we see a follow through of the selling tomorrow morning. So from a trade management standpoint it has more to do with whether letting that .75 ride for that opportunity makes sense, or if taking the small loss and moving on or even rolling out a few months makes sense. If we did see the stock test its 50 day moving average tomorrow the trade could be worth close to $4. But it could also be worthless if the stock stays above 230. So it’s a bit of a roll of the dice.