Are Goldman Options Cheap?
Let me lead off by saying I put my money where my mouth is, I bought GS calls today.
I have been very firm and clear that I think this is all a little silly. The market has sold this stock down for little or no reason other than the fact that it is politically correct to sell the stock. The case itself is supposedly weak. If it wasn’t GS probably would have settle already. The company is keeping clients and has customers coming out of the woodwork to defend them. The earnings have been great. Yet still the stock is off over 16% in about one week.
Some Chart!
Looking at the movement of the stock currently the At-The Money implied volatility of GS is at about 37. Currently a 1 day standard deviation (based on a 365 year) is about 3.04. The stock has not had a single day where its range did not exceed that number. And close to open has moved more than 3 dollars on several other occasions. The stock is moving!
Look at the Movement!!!
Even with the relatively low IV I do not think a straddle is a good idea. First off a 4% average move is probably not going to continue to happen. Second off, for all we know the stock may move 6 bucks a day but in a somewhat tight range. Industry events could lower IV in general. Finally, there could be a hurry up and wait on the stock that cause the implied volatility to tank.
So what can traders do? I think traders should play this sucker directionally. Here are a few ideas:
1. Buy calls or puts: with the IV somewhat low relative to movement as much as I hate owning premium I can’t think that selling GS premium is smart with the way the stock has been moving.
2. The off center strangle might make some sense. Especially if you the trader is bullish. I currently only hold calls, but if I was a longer term bull I would buy calls close in to GS because I felt it was rallying. I would then buy cheaper puts further out because if I am wrong about GS and the stock tanks, my feeling is that it is really going to take the pain.
3. The old broken wing fly might make sense as well. This is probably the cheapest option and in turn has the worst
4. Finally, there was the trade I showed the other day here: GS TRADE. If I had traded this spread I would have been out when GS dropped down to 147 at the beginning of the week.
FYI, I just got done with the planning meeting for Expiring Monthly. You guys are in for a treat over the next few months. If you haven’t read the issue on skew, you really are missing out. Check it out here: Expiring Monthly
Mark Sebastian Director of Education OptionPit.com
