Monday, October 17, 2011

Goldman Sachs (GS) - Earnings Vol and Preview

GS is trading $95.82, down 0.9% with IV30™ up 0.9%. The LIVEVOL® Pro Summary is below.


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The Goldman Sachs Group, Inc. (Goldman Sachs) is a bank holding and a financial holding company.

GS has earnings due out tomorrow BMO. For an interesting article on the possibility of a reported loss, you can check out this link from Zero Hedge which is based on a very well reviewed Bloomberg article:
Is Goldman About To Report Only The Second Loss Since Its 1999 IPO?, submitted by Tyle Durden.

I'll stick to vol analysis and honestly, it's pretty simple. Vol is high -- really high... or is it?  Let's start with the Charts Tab (two years). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

On the stock side, we can see that the valuation has been cut in half over the last two years -- I'm guessing you already knew that. On the vol side, check out how high IV30™ is relative to anything over the time period. NB: The earnings periods are denoted with an "E" icon on the stock chart.

To further the analysis, let's focus on the vol chart by itself, with that same "E" icon embedded where appropriate.

Even though the IV30™ is off the extreme highs from a couple of weeks ago (ish), the implied is still substantially above any other earnings period. In English, the option markets reflects higher risk in this earnings report than at anytime prior in the last eight quarters (including seven earnings cycles).

Let's look to the Options Tab to turn the vols into actual option prices.

With expiration just a few days away, we can essentially attribute the option prices to the earnings risk. Here's what caught me off guard. The Oct 95 straddle is priced at ~$6.20... Or said differently, a two standard deviation move is ~$12.50. Hmmm...

Is there really only a 2.5% chance that GS is above ~$108 or a 2.5% chance that GS is below ~$84 off of earnings? I dunno... Would you bet that GS will move more or less than $6.20 from $95 by expo? Either way, would you have imagined that was the highest it's been for any earnings release over the last two years (in percentage terms)?...

This is trade analysis, not a recommendation.

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