Banking

This Options Strategy Offers A Quick 19% Return On GS Stock

Goldman Sachs (GS) had an impressive breakout above the 50-day moving average following the firm’s earnings announcement last week. 

Goldman Sachs stock is ranked No. 1 in the Banks-Money Center industry group, with a Composite Rating of 96, an EPS Rating of 90 and a Relative Strength Rating of 89. 

As of Friday’s close, GS stock was just 3.5% below the 52-week high, and on Monday was only 2% from a 420.86 buy point. 

Traders who expect strength in Goldman Sachs stock to continue could look at a bull put spread option trade. 

Bull Put Spread In Goldman Sachs Stock

To execute a bull put spread, an investor would sell an out-of-the-money put and then buy a further out-of-the-money put. 

Selling the put that expires Nov. 19 with a 385 strike price and buying the 380 put would create a bull put spread. 

This spread was trading for around 80 cents per share on Friday. That means a trader selling this spread would receive $80 in option premium for a 100-share block, and would have a maximum risk of $420. 

That represents a 19% return on risk between now and Nov. 19 if Goldman Sachs stock remains above 385. 

If Goldman Sachs stock closes below 380 on the expiration date, the trade loses the full $420. 

The breakeven point for the bull put spread is 384.20, which is calculated as 385 less the 80 cents per share option premium per contract. 

This bull put spread trade has a delta of 4, which means it is a similar exposure to owning four shares of GS stock, although this exposure will change over time as the stock price moves. 

Home Depot Another Choice

In terms of a stop loss, if the spread increased in price from 80 cents to $2, I would consider closing early for a loss.  

Home Depot (HD) is another stock where this strategy might be appropriate; however, earnings are anticipated to be before the November options expiration.  

When trading Home Depot stock, it might be better to choose an expiration date that is before the earnings announcement. 

Please remember that options are risky, and investors can lose 100% of their investment.  

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions. 

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ 

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