Copyright Barchart
Goldman Sachs (GS) stock has been trending lower for the last few weeks and is now below the 50-day moving average. I’m willing to bet that the stock won’t rise too much further, and today we’re going to look at a Bear Call spread trade that assumes GS won’t rise above 810 in the next four weeks.. A Bear Call spread is a bearish trade that also can benefit from a drop in implied volatility. The maximum profit for a Bear Call spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received. GS BEAR CALL SPREAD To create a Bear Call spread, we sell an out-of-the-money call and then by another call further out-of-the-money. Selling the November 21 call with a strike price of $810 and buying the $815 call would create a Bear Call spread. This spread was trading for around $0.70 yesterday. That means a trader selling this spread would receive $70 in option premium and would have a maximum risk of $430. That represents a 16.3% return on risk between now and November 21 if GS stock remains below $810. If GS stock closes above $815 on the expiration date the trade loses the full $430. The breakeven point for the Bear Call spread is $810.70 which is calculated as $810 plus the $0.70 option premium per contract. COMPANY DETAILS The Barchart Technical Opinion rating is a 56% Buy with a Weakest short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend. The Goldman Sachs Group, Inc. is a leading global financial holding company providing IB, securities, investment management and consumer banking services to a diversified client base. Conclusion And Risk Management One way to set a stop loss for a Bear Call spread is based on the premium received. In this case, we received $70, so we could set a stop loss equal to the premium received, or a loss of around $70. Another stop loss level could be if the stock broke above $800. 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.
