Thursday, March 4, 2010

Dissecting Call Speculation on Goldman Sachs Group, Inc. $GS

3/4/2010 2:38 PM




Goldman Sachs Group, Inc. (GS) has attracted the attention of a skeptical spread trader today, with one option player appearing to open a short call spread at the stock's April 160 and 165 strikes.

GS price chartAround 10:17 a.m., a block of 2,000 contracts changed hands near the bid price on the equity's April 160 call, netting the trader a premium of $7.35 per contract. Simultaneously, a block of 2,000 contracts crossed the tape on GS' April 165 call at the ask price of $4.90 per contract.

In other words, it appears that the 160-strike calls were sold, while the 165-strike calls were purchased. This spread trader is betting that GS will backpedal below $160 per share prior to April expiration, allowing both options to expire worthless. In this scenario, the initial net credit would be retained as the maximum potential profit. Meanwhile, the purchase of the April 165 call serves as a built-in hedge in the event that the stock should unexpectedly rally.

Alternatively, it's also worth considering the idea that this is a roll trade -- that is, the trader is closing out his April 160 calls and purchasing an equivalent number of April 165 calls, in order to maximize his leverage on an upside move. The overnight fluctuations in open interest at these strikes should clarify the exact nature of today's activity.


  -posted by Elizabeth Harrow

No comments:

Post a Comment