Investors Snap Up Goldman Calls Before Earnings

Many option traders wanted to put their hands around the call options in Goldman Sachs on Monday, reflecting optimism about the prospects for favorable earnings from the investment bank.

Goldman Sachs
Goldman Sachs

Goldman will report second-quarter results on Tuesday before the bell. Wall Street analysts expect earnings ranging from $3.03 to 3.99 per share. The consensus estimate is $3.42, according to Reuters estimates.

On the New York Stock Exchange, shares in Goldman closed up 2.13 percent, or $3.80, at $182.09.

In the options market, many investors bought calls, hoping to catch a share rally or cover short positions. Some also bought puts, possibly to shield their portfolios.

Some of the optimism may be due to the fact that Goldman has easily topped analyst estimates over the past few quarters, said independent options trader Frederic Ruffy.

According to Reuters Estimates, Goldman has beaten analyst targets by an average of 73 cents per share over the past four quarters. (See a discussion on trading strategy for Goldman and Morgan Stanley in the video).

Recently, pressures on the brokerage industry have risen because of the economy, slowing investment banking activity and perhaps most importantly, more evidence of faulty risk management.

"Throughout it all, Goldman Sachs has been the diamond in the rough," said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

"Investors are anticipating that Goldman's guidance and quarterly profits will not disappoint them," he said.

Scott Fullman, director of derivative investment strategies at broker-dealer WJB Capital Group, shared the view.

"You are seeing speculation that Goldman is going to report better-than-expected results based upon the number of calls being traded," he said. "We are also seeing put buying as a possible hedge for long stock positions."

Total option volume was running three times the usual level, with about 127,000 Goldman calls and 84,000 puts traded, according to option analytics firm Trade Alert.

Most of the action was centered in the front-month calls which go off the board this Friday.

Among the most popular contracts were the June $175, $180 and $185 call strikes, allowing investors to buy Goldman shares from $175 to $185 a piece.

The volume in the call strikes far exceeded their respective open interest, indicating traders opened new positions at these soon-to-expire strikes, analysts said.

"The majority of these front-month calls were bought, suggesting investors believe the investment bank will have a very good quarter instead of a very bad one," said Jon Najarian, a founder of Web information site" "This is a very expensive stock to speculate in, and it looks like Goldman could make another attempt at $200 this year." Najarian said.

The options are also pricing in a sizable move in Goldman shares on the back of its quarterly results.

Goldman options are implying a plus or minus 5 percent move, or a swing of $9, in the aftermath of its earnings, said Christopher Hauck, director of the equity strategy group at Deutsche Bank.

Some models predict a bigger move.

Using his data, Credit Suisse equity derivatives strategist Sveinn Palsson found the option market is forecasting a move up or down of 6 percent, or $11 per share.