Here’s one potential way to take advantage of the panic towards Goldman Sachs shares right now, if you think it is overdone and in the end Goldman will survive for the most part. Goldman Sachs January 2011 $130 put options have spiked to about $10. This means that if you were to sell them, you’d collect $10 of premium.
If Goldman falls below $130 during the next year, you’ll be forced to own the shares, but your cost will be about $120. Thus this would be a bet that Goldman shares remain a good deal at $120, even despite the recent allegations. If Goldman doesn’t break $130, you walk away with $10 of premium income, which comes to 8.33% of premium vs. the $120 you have exposed (value at risk) in the trade.
There might be other options dates that work better, such as more near-term ones which will be more aggressive, but as shown in the chart below, Goldman hasn’t been down to $120 in quite a while. Most likely it won’t get back there, and if it does, it will only be temporary. Don’t forget, Warren Buffett’s Goldman warrants had conversion rights at $115, so he seemed relatively confident that the shares could go much higher than this, which they did, and as they will probably remain in the long-term.
Note: The author does personally not own Goldman shares, nor Goldman options, but investors he speaks with may. Far more work needs to be done here, this is just a lead, not an investment recommendation. All details here should be checked for accuracy and everyone must do their own due diligence.
Business Insider Emails & Alerts
Site highlights each day to your inbox.