Just 5 days ago we took a look at the banking sector and Goldman Sachs in particular. Here’s some of what we had to say at the time, from May 26th:
And then there are bank stocks, a sector that rocketed out of the gates on November 9th, accounting for a good bit of the gains in indices like the Dow Jones Industrial Average in November and December, but have woefully underperformed the broad market in 2017, with the XLF up 2% ytd vs the SPX up nearly 8% and the DJI up nearly 7%, but I guess most importantly down 6.5% from its 52 week and multi-year highs made on March 1st.
I want to focus on Goldman Sachs (GS) as a way to express the view that bank stocks may be the next group to give back its post-election gains. Back on April 18th GS reported Q1 results that sent the stock down nearly 5%, and while it is trading very near the levels of the day before earnings, the lack of bounce with the SPX at fresh all-time highs in mildly disturbing.
We detailed a simple trade in GS, a put spread in July:
GS $222.50 Buy July 220 – 195 put spread for $5
-Buy 1 July 220 put for 6
-Sell 1 July 195 put at 1
The banks stocks are taking it on the chin today, and with Goldman now 211, this trade is worth about a double. It makes sense to take risk off here. With a simple put spread this is fairly easy to do, selling half of the original position at $10+ takes all of the risk off the table and allows for up to $15 more in profits. For those with just 1 contract, the entire trade can be taken off for a nice profit, or the same effect of taking off risk but maintaining a bearish position can be had by rolling the 220 put down to the 210 line, or by rolling the entire trade to the 215/200 put spread. Both reduce risk to close to zero, however, each establishes a new breakeven below the current level so the rolls are only for those that see lower lows.