Short Goldman Sachs (GS) with Low Risk
08/25/2011 7:00 am EST
If the recent news-driven decline in Goldman Sachs (GS) continues, option traders can employ a specific spread trade strategy that provides limited risk and unlimited profit potential.
Shares of financial behemoth Goldman Sachs (GS) experienced a flurry of selling earlier this week on news that Chief Executive Officer Lloyd Blankfein hired a defense attorney. Traders took the stock down 5% in a mere 15 minutes, displaying fears about what kind of trouble may be coming down the pike for the largest US investment bank.
While the stock is already down a substantial amount over the past month (the stock was up 0.2% on Tuesday), a put-ratio back-spread strategy offers an interesting risk/reward payoff for those looking for even more selling pressure.
First, let’s look at a daily chart:
The stock has had a decent past few sessions, but most traders feel like GS still has room to run a bit lower before putting in a bottom.
The back-spread option trading tactic is typically used to capitalize on a large downward move in a stock, but with minimized exposure if the stock stages a surprise move higher. It consists of selling a higher-strike put option while buying multiple lower-strike puts in the same expiration month.
To enter the spread on GS, traders can sell to open one September 100 put for $5.50 while buying to open two September 90 puts for $3.15 apiece. The net debit for the spread comes to $80, which represents the maximum upside risk if the stock remains above $100 by September expiration.
Since the spread involves an extra-long put option, it offers unlimited profit potential to the downside. The risk graph below displays the potential risk and reward of the position.
This trade loses money as time passes, so traders should consider exiting a few weeks prior to expiration in order to avoid time decay in the option’s value.
See video: Trade Options Expiration Like the Pros
By Tyler Craig of TylersTrading.com