Goldman Sachs is currently showing one of the highest RSI readings of all S&P 500 stocks. The current reading of 78.93 has not been seen on Goldman Sachs stock since late 2020. And in just over a month, GS has rallied from 290 to 390.
With such a high RSI (Relative Strength Index) reading, it's unlikely that GS will rally much more in the short term. But, for such a strong stock, it's also unlikely that it will drop too much.
What I'm thinking in this scenario: try an unbalanced iron condor in Goldman Sachs stock with a slightly bearish bias. To achieve this, use a wider price spread between the two call options than the spread between the two puts.
As a reminder, an iron condor combines a bull put spread and a bear call spread.
Goldman Stock Today: Setting Up The Spreads
First, we take the bull put spread. Using the Dec. 16 expiry, we could sell the put option in Goldman Sachs stock with a 355 strike price and buy the 350 put. That spread could be sold Tuesday for around $0.75.
Then set up the bear call spread. Place it by selling the 415 call and buying the 425 call. This spread traded around $0.90.
Notice that the call spread has a 10-point width between the two strike prices. As for the put options, the spread is only five points wide. So, this gives the overall trade a slight bearish bias, but also more risk on the upside.
In total, the iron condor will generate around $1.65, good for $165 of premium.
Risk Vs. Reward
The profit zone ranges between 353.35 and 416.65. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Therefore, if we take the premium ($165) divided by the maximum risk ($835 in the case of the two calls if GS stock traded above 425), this iron condor trade in Goldman Stock gives the potential to return 19.8%. A stop loss in this case might be calculated based on 25% of capital at risk, so a loss of around $210.
According to IBD Stock Checkup, GS ranks No. 1 in its money center bank group. Goldman Sachs stock also sports a Composite Rating of 87, an EPS Rating of 58 and a Relative Strength Rating of 89.
Please remember that options are risky, and investors can lose 100% of their investment.
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
