360 Degrees of Goldman Sachs

Davey Collars Goliath, by Steven Smith

Some of you out there with big gains in Goldman Sachs are probably getting nervous that rising rates and Goldman's dependence on proprietary trading leave it vulnerable to a downdraft. Then again, Goldman has a good thing going on, and you'd hate to leave the party before the punch has been fully spiked. Let's look at an option strategy that will secure profits but also retain the potential for unlimited upside gains.

Some call it a slingshot. As far as I know, the term was coined by Charles Cottle, a.k.a. the RiskDoctor. The position is a variation on a collar: It limits the downside but also provides unlimited upside potential. The strategy is appropriate for someone who has enjoyed a substantial portion of Goldman's 60% gain over the past 52 weeks and has a decent amount of capital and time available to make adjustments, if necessary.

Here's an example of a typical collar: Assume you own 1,000 shares of Goldman, which is currently trading around $159 a share. One could buy 10 of the July $155 puts for $5 a contract. This is a married put, and it would limit your downside risk by locking in an effective sale price of $150 per share. It also maintains unlimited upside potential, but the cost basis, or upside break-even, is now $163 a share. To "collar" the position, one would then sell a contract like the July $160 call at $7.50 a contract. This would finance the cost of the put, bringing the break-even, or effective sale price, up to $152.50 a share, but it would also cap the upside at $162.50, for a 2.5% gain over the next three months.

The slingshot involves selling a call spread, not just a single strike. For example, instead of selling 10 $160 calls, one might sell 20 $165/$170 call spreads for a credit of $2 each. This translates into paying $4, or 80% of the cost of the $155 put, so the effective sale price is locked in at $154, a $1, or 0.06%, decline. More importantly, it opens up the upside potential. For example, if the shares climb to $165, you realize the 4.4% gain.

The worst-case scenario would be if Goldman is at $170 on the July expiration. This would result in a gain of just $1, or $1,000 on the 1,000 by 20 call credit spreads. Make $11 on the 1,000 long shares, lose $10 on the 20 $165/170 credit call spread. But if Goldman rises above $170, the position becomes once again outright long 1,000 shares and has an unlimited profit potential.

So if you think Goldman can climb more than 7% in the next three months, the slingshot might make sense. If you suspect the stock will stall, go for the regular collar.

Reduce Holdings, by Richard Suttmeier

ValuEngine rates Goldman Sachs as a buy, but its shares are trading 11.3% over their fair value of $142.50. Its weekly chart shows overbought momentum, with the five-week modified moving average at $149.68.

Despite the rising yield on the 30-year bond, its fair value, according to my model, has risen from $125.92 on March 13 to $143.94 on April 4 due to its tremendous earnings report on March 14. Wall Street analysts have raised their 12-month forward EPS estimates.

On April 4, I suggested that investors should reduce holdings if the stock crossed above my monthly risky level of $159.86, which it did -- that level is now likely to be a pivot around which the stock will swing. My model shows that buyers are likely to emerge if it falls to my monthly value level of $152.17 -- a drop below it could extend to my quarterly value level of $132.69.

What's the next stock to get the "360 Degrees" examination? You decide. Select from these choices and look for the column next week.
	Alcatel Akamai Lehman Nokia