Use Options to Bet Against Goldman Sachs

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Shares of financial behemoth Goldman Sachs (NYSE:GS) experienced a flurry of selling late Monday on news that Chief Executive Lloyd Blankfein hired a defense attorney.  Traders took the stock down 5% in a mere 15 minutes — displaying fears about what kind of trouble may be coming down the pike for the largest U.S. investment bank. 

While the stock is already down a substantial amount over the past month (the stock was up 0.2% on Tuesday), a put-ratio backspread strategy offers an interesting risk-reward payoff for those looking for yet more selling pressure.

This tactic is typically used to capitalize on a large downward move in a stock, but with minimized exposure if the stock stages a surprise move higher.  It consists of selling a higher strike put option while buying multiple lower strike puts in the same expiration month. 

To enter the spread on GS, traders can sell to open one September 100 put for $5.50 while buying to open two September 90 puts for $3.15 apiece.  The net debit for the spread comes to $80, which represents the max upside risk if the stock remains above $100 by September expiration.  Since the spread involves an extra long put option, it offers unlimited profit potential to the downside.  The risk graph below displays the potential risk and reward of the position.

The trade loses money as time passes, so traders should consider exiting a few weeks prior to expiration to avoid time decay in the option’s value.

Source:  MachTrader

Source:  MachTrader

At the time of this writing Tyler Craig had no positions on GS.

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Article printed from InvestorPlace Media, https://investorplace.com/2011/08/use-options-to-bet-against-goldman-sachs/.

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