Options Trading & Analysis

Finding Edge in Goldman Sachs Options


It turns out there is some edge in Goldman Sachs Group Inc (NYSE:GS) options over the last six-months and as far out as the last two-years, and the results are staggering.

STORY
It's a reasonable analysis to do -- to find a way to make money trading Goldman Sachs Group Inc options, but rather than betting on large move up in the stock, simply betting that there isn't a large down move. That's the place a lot of the financials find themselves now, and GS has a fascinating phenomenon within its options.

STRATEGY
Let's examine a short out-of-the-money put spread in GS over the last two years, and we'll look at trading every week (weekly options). Here are the results:



A 103% return is fantastic, but there's a lot of risk here, especially surrounding Goldman Sachs Group Inc earnings dates. So, let's take the next step and do this same test, but eliminate earnings by essentially skipping the earnings week.



We can actually see the return is higher at 118% versus 103% even though we took less risk. That's remarkable. We can also see that the trade had 79 wins and 22 losses, yielding a 78.2% win-rate. This is also our signal that there is edge.

We are examining selling the 30 delta put and buying the 10 delta put in Goldman Sachs Group Inc. In option speak, the delta is roughly the probability that an option will expire in-the-money. So, while a 30 delta put should end up in the money 30% of the time, that means selling it should be a winner 70% of the time.

But, we can see a 78% win-rate, meaning we have found, in the strictest terms, 'edge.' And edge, is the entire goal of option trading. As good as this looks, it turns out the news is actually better. This edge in Goldman Sachs Group Inc (NYSE:GS) puts, or edge in selling GS puts, has gotten stronger more recently.

Here are the results of selling that put spread over the last 6-months, and always avoiding earnings:



Not only are the returns incredibly high, but check out that win-rate percentage. We're looking at 23 winning trades and 3 losing trades for a 88.5% win-rate. Remember, that 30 delta put should be a winner for a short seller 70% of the time. The edge is sustained, and getting stronger. The result is yet higher returns.

THE KEY
The key here is to find edge, optimize it -- in this case by avoiding earnings risk -- and then to see if it's been sustained through time. For GS it has, and that makes for a powerful result. But, we don't just want one strategy or one stock that has edge -- we actually want a portfolio of them.


Tagged with:

About Ophir Gottlieb


Mr. Gottlieb writes financial news for CML and also as a contributor to Yahoo! Finance, CNN Money, MSN Money, and before then for Marketwatch, Business Insider, TheStreet and Real Money. He has become a staple in financial TV, often times seen on the Business News Network and CBC. Mr. Gottlieb's experience includes working as an option market maker on the NYSE ARCA exchange floor (CBOE remotely), as Managing Director of Client Services and Algorithmic Trading for Livevol, Inc, and as the Managing Director and Product Manager of Quantitative Research for GMI (now MSCI). Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model, both purchased by MSCI. FAM has been a celebrated achievement in artificial intelligence and quantitative finance that was introduced to world by the Rotman International Journal upon its completion. Mr Gottlieb's mathematics, measure theory and machine learning background stems from his graduate work at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron's, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Author's web site: http://bit.ly/2mnZAmV


View Ophir Gottlieb's post archive >

Advertisement Continue reading

The Options News RundownAudio

Your source for the most important news and information from the world of options.

The Options Insider Radio NetworkAudio

All of our radio programs in one convenient place.

Options Insider RadioAudio

The original options podcast. Features interviews with leading options figures.

The Option BlockAudio

This high-octane program features education, analysis, strategies and unusual activity.

Volatility ViewsAudio

The premier radio program for volatility traders.

The Long And Short Of Futures OptionsAudio

Your source for futures options information.

The Advisor's OptionAudio

Arming advisors with the info necessary to manage risk.

Options Boot CampAudio

Get into peak options trading shape.

Options Insider Special EventsAudio

Compelling panel & special event recordings from the options world.

OIC's Wide World of OptionsAudio

A dynamic mix of current events, investor resources, & strategy insights.

Trading Tech TalkAudio

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Options Playbook RadioAudio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options OdditiesAudio

We track all the unusual options trading activity on Options Oddities.

This Week in Futures OptionsAudio

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

The Business ShowAudio

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.
x

The Options Insider Radio Network

The Options News Rundown

Your source for the most important news and information from the world of options.

The Options News Rundown

The Options Insider Radio Network

All of our radio programs in one convenient place.

The Options Insider Radio Network

Options Insider Radio

The original options podcast. Features interviews with leading options figures.

Options Insider Radio

The Option Block

This high-octane program features education, analysis, strategies and unusual activity.

The Option Block

Volatility Views

The premier radio program for volatility traders.

Volatility Views

The Long And Short Of Futures Options

Your source for futures options information.

The Long And Short Of Futures Options

The Advisor's Option

Arming advisors with the info necessary to manage risk.

The Advisor's Option

Options Boot Camp

Get into peak options trading shape.

Options Boot Camp

Options Insider Special Events

Compelling panel & special event recordings from the options world.

Options Insider Special Events

OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

OIC's Wide World of Options

Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

Trading Tech Talk

Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

Options Playbook Radio

Options Oddities

We track all the unusual options trading activity on Options Oddities.

Options Oddities

This Week in Futures Options

The program designed to help active futures options traders stay on top of this ever-changing marketplace. 

This Week in Futures Options

The Business Show

If you like business, if you like humor, if you like stock symbols, this is the podcast for you.

The Business Show

Options Playbook Radio 155: AMZN Skip-Strike Butterfly

Earnings season makes an AMZN skip-strike butterfly an interesting prospect.

Options Playbook Radio 155: AMZN Skip-Strike Butterfly