2 Goldman Sachs Option Spreads

Goldman Sachs Group, Inc. (NYSE: GS ) is offering two interesting trading setups for option traders depending on their directional bias. The daily chart places GS in a descending channel and provides defined risk for traders who want to get short. Those who remain bullish could get long and use the 50-period moving average as a stop. At this stage in the December option expiration cycle, utilizing time decay (Theta) as either a profit engine or a way to reduce the cost of a spread is a sound trading strategy. With less than three weeks until expiration, time decay accelerates rapidly on its inevitable path to 0 at expiration. This process increases dramatically the final two weeks leading up to expiration. Option traders that utilize time decay to reduce the cost of a spread or as the primary profit engine of a trade construction (credit trades) are capitalizing on an inevitability. Clearly there are inherent risks, such as an increase in implied volatility , but without question at option expiration the time value of options will be reduced to 0. Time decay and implied volatility are the two most likely culprits as to why novice option traders consistently lose money trading options. Understanding a few basic principles regarding option Greeks is critical in order to produce profits. The daily chart of Goldman Sachs is shown below along with two trading options. These are not recommendations, but simply examples of the profitability that options can add to your trading if they are used appropriately. Bullish GS Trade Those who are bullish with regard to Goldman Sachs could use a call vertical ( bull call spread ) with the following strikes: Long 1 GS Dec 160 Call Contract Short 1 GS Dec 165 Call Contract Through the use of a hard stop well below the 50-period moving average, an option trader could define his risk while having a quality risk/reward trade. The maximum loss on this trade would be less than $180 per leg, while the maximum gain would be slightly over $320 not including commissions as of Wednesday morning. The use of a hard stop would reduce risk further and could potentially lead to a nice profit in the days to come. Bearish GS Trade For traders who want to press the downside, a put vertical ( bear put spread ) could be used with a contingent stop around the $161/share price level. The trading setup is as follows: Long 1 GS Dec 160 Put Contract Short 1 GS Dec 155 Put Contract The maximum loss per side for this trade would be around $230 while the maximum gain is $270 as of Wednesday morning. Similar to the call vertical spread listed above, the use of the contingent stop reduces the intra-day risk even further. While these setups are about as basic as it gets regarding option trading, they can really produce some nice profits. I am giving away my free analysis and book on how to find and trade the right options strategy This short and to-the-point guide is full of my trading techniques and tips that will help you not only protect your portfolio, but grow it. Click here.
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