Sold GS Naked Put

Barron’s cover story from this weekend was on Goldman Sachs Group ($GS). While I try to read most of the articles in Barron’s every weekend, I rarely read more than half of them. This past weekend I made it through more than usual, including the bullish article on GS. Not every cover story speaks to me, but this one did, and I decided I should consider getting into it today. I figured we’d see a pop higher to start the day based on the article and that’s what happened. I wanted to give the morning price action a little time to show if it would simply turn over quickly while the broader market was in the red or if it might have legs. After about 30 minutes, I saw GS come off its morning highs and thought it would be worth a limit order if it came down further.

While GS was trading at $271.34, I sold one GS March $265 naked put for $5.90 and received $589.31 after paying $0.69 in commission. GS continued to decline to $270.50 within 10 minutes of my order going through before pushing higher again. So, I could’ve made a little more income from the option, but think I’ll be fine with the $5.90 premium I received. Before entering this limit order that hit, I thought about the $260 and $270 strikes, but decided I liked the risk/reward for the $265 strike best. If GS remains above $265 by March options expiration, I’ll make 2.23%, 16.84% annualized. GS can drop 4.47% before I take any loss.

I looked at the GS chart after reading the article to see where it could find support or resistance in the coming weeks. Resistance is hard to peg for GS since its trading at an all-time high and just broke above its trend line of higher highs. This trend line of higher highs could become a new line of support as GS continues on the same trajectory, but from a higher starting point. If the upper trend line does not become support, I see multiple lines that could all help GS stay elevated at least enough to keep me from losing money.

Starting from the bottom, Goldman’s trend line of higher lows that started with the September 7, 2017 intraday low moved above $250 today and is on track to be above $160 by March 16.┬áMy cost per share if assigned will be $259.21. So, I’m expecting this line to hold support, which was a major factor in my choice or strikes. Actually, I don’t think GS will fall that far before March expiration, which is why I didn’t wait for a larger decline before making today’s trade. Before reaching the lowest trend line on my chart, a steeper trend line of higher lows that started at the November 28, 2017 intraday low (this low was also used to mark my other trend line) will come into play. I can see GS staying above this line and helping GS finish mid-March above $270.

All of Goldman’s moving averages are ascending and each could provide support. The 10-day and 50-day look like they’ve had more influence for support and resistance over the past few months, but neither is magical. The 10-day moving average is at $261.58 today followed by the 20-day at $258.21 and the 50-day at $252.44. These three lines are ascending quickly and even if GS falters in the near-term, these moving averages should give reason for pause before it drops too much.

The one big hesitation I had for this trade is that it equals roughly 25% of my account value. I don’t like having 1/4 of my cash allocated to a single stock, but I think financials will do well in the rising interest rate environment. If GS can improve its trading division, it’ll have a lot more upside potential. It will actually strengthen in a more volatile market because the slow and steady market we’ve had for the past 13-14 months has cut into trading profits as investors became more passive. The second (small) reason I hesitated with GS is that I’ve never traded on it before. I thought I had, but couldn’t find any record in my Quicken history going back nearly 20 years. I’m fine with trading on a new stock, but I usually like to follow them longer before I allocate 25% of my account to it. I’m not coming in blind to it and did leave myself a decent cushion, which will help me sleep at night.

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