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What the Options Market is Saying about Goldman Sachs

Options activity in Goldman Sachs may be signalling its stock has further downside in store, despite the fact the shares rebounded along with financials and the broader market Monday.

Volatility is nearly 65 percent for one-week options, and sentiment was somewhat bearish as shares of Goldman Sachs dipped below the psychologically relevant $100 level for the first time in more than two years Monday.

The Goldman Sachs booth on the floor of the New York Stock Exchange
Getty Images
The Goldman Sachs booth on the floor of the New York Stock Exchange

With the stock on a downward trend, puts have been trading at a premium to calls but, not to the degree you might expect.

Goldman Sachs is "...always a big name for speculation, regardless of the fact that it is under pressure," said Steve Sosnick, Equity Risk Manager at Timber Hill.

Because of that, he said there has been some buying of out of the money calls and that is keeping the skew to a minimum. Skew is the implied volatility of options on a particular asset—in this case, Goldman Sachs across different strikes.

But, Sosnick cautions that while the stock may feel oversold and its P/E relatively low , "...we have all seen cheap stocks get cheaper." He said the volatility in Goldman options is now two to three times normal levels.

And option pricing definitely indicates a downward bias. With Goldman trading around $100 a share, Bill Lefkowitz of vFinance Investments noted that $90 puts expiring Friday, September 16 are priced near $0.50 versus $110 calls at $0.30.

"GS, BAC (Bank of America), AIG, JPM (J.P. Morgan)are all getting beaten up, trend on almost all the financials has been down", he added.

In October, Goldman options are pricing volatility near the 60-percent level, or expectations of a daily price move of nearly four percent.

At-the-money straddles with that October expiration are trading near $16 which means, with Goldman at $100, a buyer of that straddle would need shares to be below $84 or above $116 to make money at settlement. But that is exactly what some traders think is possible.

With earnings as a potential catalyst for the broader market, Andrew Keene, an independent trader and blogger, is looking for an entry point at about that level.

"I have been a buyer of at-the-money straddles for October," he says. "Earnings could be a catalyst to make the market go higher."

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