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Bullish Bettors Buy Calls on Goldman Sachs Group, Inc.

As the shares rebound from their 2008 lows, traders are snapping up new call positions

by Elizabeth Harrow (eharrow@sir-inc.com) 1/5/2009 11:50 AM

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It looks like investors today are buying to open new call positions on Goldman Sachs Group, Inc. (GS: sentiment, chart, options). In early trading, 2 GS calls were among the most heavily traded options on the Pacific exchange.

Specifically, the stock's January 2009 95 call (GS AS) saw volume of 8,079 cross the tape on this exchange, compared to open interest of 19,214. Meanwhile, the equity's January 75 call (GS AO) saw 8,019 contracts change hands on open interest of 13,280.

While this symmetrical volume would seem to indicate some kind of spread strategy being initiated, further research suggests this isn't the case. Three significant transactions occurred on these 2 strikes at 10 a.m., with the first being a block of 7,800 contracts on the 95 call. This block crossed the tape at the ask price of $1, which indicates that the contracts were purchased.

Likewise, 2 identical blocks of 3,900 contracts apiece changed hands at the ask price of $12.45, again suggesting that these calls were purchased. With all 3 major transactions on these 2 options occurring at the ask price, it seems unlikely that a traditional credit or debit spread is being initiated -- these strategies generally involve the purchase and sale of options at different strikes.

So, is there reason to buy calls on GS? Well, the stock is currently enjoying a minor rally. Since dropping to a low of $47.41 in late November, the equity has rallied an eye-popping 83%. Goldman's 10-day and 20-day moving averages have provided support for this recent rebound.

Daily Chart of GS since November 2008 With 10-Day and 20-Day Moving Averages

However, a potential roadblock lies almost directly overhead. The stock's 80-day moving average is dropping through the 94 region, and could put the brakes on Goldman's rebound. This trendline previously rejected a rally attempt in early September.

Daily Chart of GS since July 2008 With 80-Day Moving Average

In other words, purchasing new short-term calls at the 95 strike looks like a risky bet. With resistance hovering just south of this region, GS needs a major boost of buying power to propel it significantly higher. Unfortunately, an exodus of the shorts won't provide much help -- it would take less than 1 trading day, at the stock's average daily volume, for all the existing shorted shares to be repurchased.

Plus, as indicated by today's option volume, option players are also bullishly aligned. The equity's Schaeffer's put/call open interest ratio (SOIR) arrived today at 0.74, just 1 percentage point from an annual optimistic peak. As GS attempts to extend its fledgling rally, it may find itself strapped for new buying pressure.

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Bullish Bettors Buy Calls on Goldman Sachs Group, Inc.

As the shares rebound from their 2008 lows, traders are snapping up new call positions

by Elizabeth Harrow (eharrow@sir-inc.com) 1/5/2009 11:50 AM

GS

stocks

options