Goldman Sachs stock put in a nice bullish candle Wednesday and bounced off the 50-day moving average.
GS stock is also showing a strong relative strength line.
One neutral to slightly bullish way to play the stock could be via a bull put spread.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
This type of trade will profit if Goldman Sachs stock trades sideways or higher and even sometimes if it trades slightly lower.
With GS stock trading around 330, if we use the Oct. 21 expiration we can sell a 295 put and buy a 290 put for around $0.65.
Trade Could Net 15% In Six Weeks
Selling this spread would generate roughly $65 in premium with a maximum risk of $435.
If the spread expires worthless, that would be a 15% return in around six weeks, provided GS stock is above 295 at expiration.
The maximum loss would occur if Goldman Sachs closes below 290 on Oct. 21. That would see the premium seller lose $435 on the trade.
The break-even point for the trade is 294.35, which is calculated as 295 less the $0.65 option premium per contract.
In this market environment, I would set a pretty tight stop loss and look to close the trade if Goldman drops below 315.
Limit Potential Losses With This Strategy
Otherwise, another good rule of thumb is to limit the loss to two times the premium received. In this case, that would be $135. Sticking to this stop loss level will help avoid large losses if the trade goes south.
According to the IBD Stock Checkup, Goldman Sachs is ranked No 2 in its group and has a Composite Rating of 63, an EPS Rating of 59 and a Relative Strength Rating of 67.
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.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
