Even with the recent pullback in indexes, the market is still in an uptrend. It's also been looking like some rotation might be on the table over the last week. Traders wanting to take bullish exposure may want to think about doing so in a limited-risk way. Today we'll look at how to do that on Goldman Sachs using a bullish butterfly spread option strategy.
Goldman Sachs Stock: Creating A Bullish Butterfly Spread
Goldman Sachs put in a strong candle on Monday and led blue chip stocks. Traders can gain some upside exposure in a low-risk way via a bullish butterfly.
We looked at a similar bullish butterfly spread a few weeks ago on Microsoft.
Butterfly spreads involve three different option strikes, all with the same expiration date, and can be created using either calls or puts.
By trading a butterfly with a bullish bias, we can place the trade cheaply and have a large potential payoff.
Assuming we have a price target of 490 for GS stock within the next few months. Let's look at how we can set up a bullish butterfly based on those parameters.
- Buy 1 Aug. 16, 470 call @ 12.30
- Sell two Aug. 16, 490 calls @ 5.80
- Buy 1 Aug. 16, 510 call @ 2.50
This trade only costs around $320 per spread, but has a payoff potential much higher than that.
The ideal scenario is for Goldman Sachs stock to be right around 490 at expiration on Aug 16.
The maximum loss on the trade is equal to the premium paid of around $320 per contract. This would occur anywhere below a Goldman Sachs share price of 470 or above 510.
Max Profit On Butterfly Trade $1,680
The maximum potential profit on the trade is $1,680. This is calculated by taking the width of the butterfly strikes (20) times 100, less the premium paid ($320).
Taking a low-risk trade like this can be one way to participate in any further rally without risking too much capital.
According to IBD Stock Checkup, Goldman Sachs stock is ranked No. 1 in its group and has a Composite Rating of 97, an EPS Rating of 86 and a Relative Strength Rating of 92.
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
