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Option Idea of the Week: Goldman Sachs

Despite shining on and off the charts, GS remains surrounded by skeptics

by 1/18/2013 12:51 PM
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Financial guru Goldman Sachs Group (NYSE:GS - 143.93) has been a stud both on and off the charts lately, yet Wall Street remains wary of the shares. However, should the skeptics change their tune, a contrarian tailwind could be in the cards for the high-flying outperformer.

Fundamentally, Goldman reported fourth-quarter earnings on Jan. 16, and the results handily topped analysts' expectations. Specifically, the firm raked in a per-share profit of $5.60, more than tripling from the same quarter a year ago, and surpassing the consensus estimate of $3.71. Meanwhile, net revenue soared 53% to $9.2 billion, compared to Wall Street's forecast for just $7.91 billion in sales.

On the charts, the shares of GS have muscled roughly 60% higher since their most recent test of support in the $90 region, ushered into the black atop their 10-week and 20-week moving averages. In fact, the stock touched a new annual high of $144.49 earlier in the session, and is now trading north of the key $130 region. This formerly supportive area emerged as resistance in 2012, but could now resume its role as a technical foothold.

Weekly Chart of GS since May 2010 With 10-Week and 20-Week Moving Averages

As we hinted at earlier, though, Wall Street remains skeptical, despite GS' quest for new highs. Currently, just eight out of 22 analysts offer up "buy" or better endorsements, meaning the stock could be due for some upgrades. In similar fashion, the average 12-month price target on the equity stands at $142.68, representing a discount to the stock's current share price.

Just this morning, analysts at FBR upped their price target on GS to $165 from $145. Should more brokerage firms follow suit, a flood of upbeat analyst attention could lure additional buyers from the sidelines.

Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 1.43, indicating that puts comfortably outnumber calls among options with a shelf-life of three months or less. Even more telling, this ratio is higher than 93% of all other readings of the past year, suggesting short-term options players have rarely been more put-heavy during the past 12 months.

In the soon-to-be front-month February series of options, the out-of-the-money 130 and 135 strikes are most popular among the bears, with about 3,900 and 3,500 puts outstanding, respectively. In the short term, an unwinding of these pessimistic positions could translate into a contrarian boon for GS.

Investors expecting GS to extend its journey higher should consider buying the stock's in-the-money April 130 calls, which were last asked at $16.20. What's more, the equity's Schaeffer's Volatility Scorecard (SVS) rests at a lofty 96, implying that GS options are attractively priced, relative to the probability of an outsized move on the charts.


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