Goldman Sachs is due to report earnings on July 15 before the opening bell. So let's analyze how we can structure an option trade that fits the view that 1) we think GS stock will stay within the expected range; and 2) the response to the earnings report is likely to be positive.
The options market is currently pricing in a 5.1% move in either direction. Also, GS stock has stayed above the lower expected range following all five of the last five earnings announcements.
Taking the at-the-money put and call for the July 19 expiration, we can see that the expected range is 5.1%. So, now that we know the expected range, let's find a bull put spread that has the short strike roughly 5.1% below the stock price.
GS Stock Today: Creating The Bull Put Spread
Selling the July 19-expiring 430-strike put in GS stock then buying the 425 put would create a bull put spread.
This spread is trading for around $0.90, based on recent trading. That means a trader selling this spread would receive $90 in option premium per set of contracts and would have a maximum risk of $410.
That represents a 22% return on risk between now and July 19 if GS stock remains above 430.
If GS closes below 425 on the expiration date, the trade loses the full $410.
Break-Even Level
The break-even point for the bull put spread in GS stock is 429.10. Calculate it as 430 less the 0.90 option premium per contract.
There is little room for adjustment with short-term trades such as this one likely to get held over earnings. A 22% return in a few weeks would be nice, but the possibility of losing 100% of the maximum risk is also very real. As such, this style of trade is only for traders with a high-risk tolerance.
According to IBD Stock Checkup, GS stock ranks No. 1 in its group and has a Composite Rating of 96, an EPS Rating of 87 and a Relative Strength Rating of 90.
The last time we looked at a trade like this was on Nvidia, which worked out well.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
