Saturday, June 16, 2007

A Close-Shave Trade on Goldman Sachs (GS)

Dear fellow stock options traders :

The trade on Goldman Sachs (GS) was initiated due to a discussion started by my buddy, Redyellowblackdog, at myLot entitled "Oversold Stocks?"

Redyellowblackdog happened to screen out a list over-sold stocks that he felt might rebound. By the way, he has a stock analysis web-site at PolyDimensional Analysis

That prompted me to take a look at Goldman Sachs (GS) daily chart. I observed that GS happened to close higher on the day ie. 8 June 2007, the day that Redyellowblackdog initiated the discussion, after a series of down days beginning from 1 June 2007.

On 11 June 2007, GS closed higher again, giving confirmation of GS's continued uptrend. I also understand that GS would be reporting earnings on 14 June 2007, and I believed that would fatten the options premium due to the increase in implied volatility.

That prompted me to paper trade 2 nos. of June 230 Call at $410.00 each on 12 June 2007. I observed the closing hours and decided to hold on to the position till the next day ie. 13 June 2007.

On 13 June 2007, GS gapped up about +$2.00 to $229.00 when market opened. I'd decided to observe GS's reaction to the release of Fed Biege Book later in the afternoon and the build-up of implied volatility leading to earnings announcement to determine whether to exit the position.

After the release of the Fed Biege Book, the stock market rallied. I also observed that GS started to move up strongly about +$2.00 to $233.00 after 3.30pm EST. That really fattened the implied volatility & intrinsic value of the June 230 Call as it became in-the-money. After observing the Level 2 Code and making a quick decision whether GS call option could fetch at least $500 a contract if it reported good earnings on 14 June 2007, I decided to close my position & sold the contracts for $530.00 a piece.

On 14 June 2007, although GS reported 2nd quarter earnings of $4.93 per share, $0.17 better than the Reuters Estimates consensus of $4.76, the stock plunged more than $6.00 when market opened due to some concerns over the sub-prime mortgage business. The June 230 Call could now fetch less than $50.00 per contract.

Related Trade in my Stock Options Trading Blog

A Winning Trade - Goldman Sachs Group Inc. (GS)

If you've managed to find out about the Live Freely! Seminar from my stock options trading blog and subsequently sign up for it, I hope you could do me a kind favour and mention Mr Tony Chai from Batch 14 as the referrer. Thank you for your kindness.

Wishing you Profitable in your Options Trading too.

Yours Sincerely,

Tony Chai