[via PRLive]
PREFACE
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.
Diversification with options is no different than diversification with stocks. So, to find a series of these results we need a tool, and that is exactly what we have.
We've just seen an explicit demonstration of the fact that there's a lot less 'luck' and a lot more planning in successful option trading than many people realize. Here is a quick 4-minute demonstration video that will change your option trading life forever: Tap here to see the demo movie
Thanks for reading, friends.
Risk Disclosure
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
