Watch GS on Tuesday

Possible Big-Mover in the Works

By Bryan Bottarelli
Friday, June 09, 2006 4:41 PM EST
Fri, 9 Jun 2006 21:41:00 GMT

Dear Bottarelli Research Member,

Another bearish week has limped to a close. Although today’s early action looked promising, the bulls still refuse to make any sort of commitment to buy into this market. The NASDAQ, for example, now sits at a 7-month low.

With the markets still vulnerable to even more selling, I’d like to keep using the same strategy as this week, which is to use protective index puts to capitalize on the downside -while at the same time — carefully getting positioned in the safest upside plays with an extended holding time. This worked on two occasions this week, with gains coming on both the DJX and the QQQQ.

But next week, there’s another strategy I’d like to throw into the mix. This one involves using a very small amount of money to get a little more speculative.

Here’s the situation…

On Tuesday June 13th of next week, we could have an explosive move in Goldman Sachs (GS – NYSE).When GS reports earnings next Tuesday, the whispers I’m hearing are that the number will be a blockbuster.

According to Thomson First Call, the investment bank is expected to earn $4.19 a share, up from $1.71 for the same period last year. Many think GS could report a number even higher than $4.19. In fact, strong M&A revenue has some traders thinking that Goldman could realistically double their already enormous profits.

Compared to the same period last year, Goldman’s global debt underwriting increased 12.3%, their equity underwriting increased 92%, and their M&A activity (which is mergers and acquisitions) increased 64%. With numbers like this, the company is literally printing money in 2006. In fact, the sale of a power plant is alone expected to add $750 million, or $0.46 a share, to next week’s number.

GS

Going into next week’s announcement, it may be worth committing a small amount of capital to a cheap, out of the money call. I’m looking specifically at the GS July 170 Calls (GPY GN) which closed the trading day between $0.75 and $0.90 per contract. If Goldman reports a number that pushes the stock up $10.00, these calls could trade as high as $2.90, good for a 242% gainer.

The same could be said about cheap puts…

Looking specifically at the GS July 125 Puts (GS SE) which closed today at $0.65 to $0.70 per contract, a poor number from Goldman that pushes the stock down $10.00 could push the value of these puts up to $2.40, good for a 242% gainer.

If you’re a ‘swing for the fences’ type of trader, you may consider adding the speculative calls to your position. Or, if you’d like to take a more rational approach, you can enter both the calls AND the puts for around a total of $1.55. If either the $10.00 upside or the $10.00 downside move happens, you can still gain 54% when the gains from one side of your position offset any losses from the other side of your position.

The catch is that Goldman has to make a BIG move for the strategy to happen. If you only see the stock move up or down a few bucks, we won’t get an explosive move large enough to push your options way, way up. But if history serves as any indication, GS is prone to big-time moves. On March 14th, the stock gapped up over $9.00 when they reported net profits 50% ahead of analysts’ forecasts. With a history of big moves, playing both sides of the market could result in a very nice winner.

Take the weekend to decide which strategy you’d like to use, and I’ll most likely issue the play on Monday. Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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