GS tanked last Friday when news broke of the SEC fraud complaint. GS fell 20 points from highs near 185 and then recovered slightly, losing something like $10 billion in market value on a single day. We have no idea who or what to believe, but several articles over the weekend are suggesting at least $1 billion in penalties, legal settlements, the kitchen sink, and whatever else analysts, journalists, and traders can muster.
Retail traders enjoy a good GS joke now and then, but hey, if you can't beat 'em, join 'em.
Interestingly enough, GS announced net quarterly earnings of $3.46 billion today yesterday. A quick check of front month May options reveals nice high implied volatility (IV), even after earnings, given the uncertainty surrounding the SEC case. In fact, May options currently have higher IV than June.
What if GS just traded right here in this range? Earnings are over, the market is still digesting news of the SEC's case, and no one knows what will happen next. The market hates uncertainty and GS can certainly still tank from here.
But, what if GS stays right here in its range? Selling front month May volatility while buying June affords an interesting double calendar with a roughly 1:1 risk reward ratio. In this case, a May/June 155 put calendar combined with a 170 call calendar paints an interesting profile.
Now, we do not officially recommend this trade or any other trade. To be clear, this double calendar example is only provided for educational and entertainment purposes. It is an exercise in observing option volatility. And, GS can certainly experience a gap up or gap down situation in the coming days which could render a spread like this unprofitable before a trader could take action. A spread like this should also never see the light of the next options expiration week in May.
But, it will be fun to watch what this does in the next 1-2 weeks if GS stays in a range and May implied volatility contracts more quickly than June IV.
