Friday, April 30, 2010

Goldman Sachs (GS) - What The Option Order Flow Predicts

GS is trading 145.83, down $14.41 with IV30™ up 43.9%. The LIVEVOL™ Pro Summary is below.

The company has traded over 380,000 options in the first three hours on total daily average option volume of 121,129. The Stats Tab snapshot is included (click image to enlarge).

Note that the net deltas are negative and the net premium is positive. So, in English - the option order flow is buying options and getting short deltas - i.e. put buying. You can see the vol is up today and the stock is down - so the option order flow is in synchrony with the stock.

The Options Tab for May (click to enlarge) uncovers some interesting things.

Note that the down side puts are worth about $1 all the way down to the 115 strike. Also, note that the 85 strike puts are worth ~$0.20. That's crazy! Not b/c they're bid, but because it actually sounds "possible." But there's more...

Now let's look at the Jan 2011 downside (click to enlarge).

The "bankruptcy" puts - i.e. the 2.5, 5, 7.5, 10 strikes are all bid in Jan. The 55 strike puts are worth ~$1.00. The market is pricing the possibility of a total disintegration of GS (but still with very low probability).

The Skew Tab (click to enlarge) is useful too.

The skew actually looks kind of "normal." Sure, the down side is bid, but that's the usual case. The upside in May is actually bent up - there is some action in the upside calls betting on a quick reversal in market sentiment toward GS. The back months show less (or no) bend upward - those options are cheaper relative to vol.

1) The option order flow in GS is active (should be ~ 8x average by the close).
2) The oder flow is getting short deltas
3) The order flow is buying options - and therefore helping to spike the vol.
4) Vol is up also because the uncertainty has increased dramatically with the criminal charges and the fact that the SEC seems like they won't just walk away this time (time will tell).
5) The front month upside vol is bent up - people are betting on a quick recovery - the back months do not show the same optimism. You might think of this as a bet that if things get better, it'll happen soon - if not soon, then not for a while or not as sharp.


Option Market Prediction: Big Movement!

This is trade analysis, not a recommendation.

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