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Goldman Sachs Option Traders Gamble on More Upside


GS speculators are targeting short-term call options.

Bullish betting has accelerated on Goldman Sachs Group, Inc. (NYSE:GS) today, with speculators gambling on a post-earnings advance for the financial concern. In early afternoon action, GS has already seen roughly 19,000 calls cross the tape as of 1:23 p.m. EST -- a 39% mark-up to its average midday call volume, and more than double the number of GS puts exchanged.

Digging deeper, it appears option bulls have set their sights on the January 2013 135- and 145-strike calls, which have seen around 2,200 and 2,000 contracts change hands, respectively. The majority of the calls have crossed at the ask price, and implied volatility is notably higher at both strikes, hinting at buy-to-open activity.

By purchasing the calls to open, the buyers expect GS to finish the week north of the respective strikes. More specifically, the volume-weighted average price (VWAP) of the 135-strike calls is $3.06, meaning the buyers will reap a reward if GS topples the $138.06 level (strike plus premium paid). The VWAP of the out-of-the-money 145-strike calls, meanwhile, is $0.24, indicating a breakeven level of $145.24 -- in territory not charted since May 2011. However, the most the buyers can lose is limited to the initial premium paid for the options.

Widening our sentiment scope, we find that today's appetite for bullish bets is becoming more common among GS speculators. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock sports a 10-day call/put volume ratio of 2.46. What's more, this ratio ranks in the 81st percentile of its annual range, implying that option buyers have picked up GS calls over puts at a faster-than-usual clip during the past couple of weeks.

Nevertheless, there's still plenty of pessimism plaguing GS, despite the stock's upward momentum of late. The equity's Schaeffer's put/call open interest ratio (SOIR) sits at 1.48, indicating that puts comfortably outnumber calls among options expiring within three months. Plus, this ratio stands just 6 percentage points from a 52-week peak, suggesting near-term traders have rarely been more put-heavy during the past year.

Since skimming the $90 level in late June, the shares of GS have advanced more than 52% atop their 10-week and 20-week moving averages. As such, the stock is now trading north of former resistance in the $130 area. This region acted as support from mid-2010 into August 2011, and could resume its role as a technical foothold.

Fundamentally, Goldman is slated to confess its quarterly earnings bright and early tomorrow morning. Analysts, on average, are anticipating a fourth-quarter profit of $3.78 per share for the firm, which has surpassed the Street's bottom-line earnings estimates in each of the past four quarters, Thomson Reuters reports.

Meanwhile, the company today abandoned plans to delay bonus payments to UK bankers, after Bank of England Governor Mervyn King criticized the tax-averting move. Originally, Goldman planned to pay the bonuses after April 6, when Britain's top tax rate will drop to 45% from 50%.

This article by Andrea Kramer was originally published on Schaeffer's Investment Research.

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