Late yesterday, I noticed call buyers flocking into Goldman Sachs. This morning the market is down ~1% including most financials, while Goldman is up 1.5%. As of this writing, according to ISE Sentiment at 10:54am, call buyers are hitting offers 3 to 1. That's a pretty bullish sentiment, and this is despite a horrible consumer confidence reading earlier today.Depending on your risk appetite, there are two ways to play GS. One through the following ratio spread:
- Sell to open 1x March $155 calls
- Buy to open 2x March $160 calls
Keep in mind that on March expiration, the break even on the upside is $166, so the stock must make a move above that level to remain profitable. Also, $162 will provide significant resistance as both 50-day and 200-day MA reside at $162.
Second, a more conservative approach would be to sell the following bull put spread:
- Buy to open March $150 puts
- Sell to open March $155 puts
The trade can be done for a net credit of $1.35 as of this writing, which provides a fixed 27% profit by March expiration as long as the stock remains above $155.
The ratio spread provides higher return, but also higher risk given that the break even point is far out at $166. Ratio spread also provides better protection and only a fraction of loss compared to a call spread if the stock plummets for any reasons. On the other hand, the bull put spread provides further cushion to the downside but very limited profit.
I went for the ratio spread and just filled the order for $1.00 debit.
Good luck!
