Trading is hard.
But then, I could have told you that.
That is the great revelation from yesterday’s Goldman Sachs (GS) Q2 earnings report.
The Wall Street giant saw profit of $3.95 per share in the second quarter, compared with expectations of $3.39 and $3.72 a year earlier.
Goldman also beat on the top line, with revenue of $7.89 billion, against expectations of $7.52 billion and $7.93 billion a year ago.
While overall earnings were better than expected, trading revenues were awful, especially in the commodities space, where oil and gold have been in free fall for many months.
The company posted the worst commodity trading results since it went public in 1999.
Such is life in a zero volatility market. Not zero exactly, but $9.50, the low seen earlier this week in the Volatility Index (VIX).
This brings lower trading volumes, narrowing trading spreads, and not enough room to make money, unless you’re a high frequency trader reaching for pennies on gigantic volumes and huge costs.
While the earnings surpassed expectations, the shares disappointed, selling off some $6 in the wake of the news.
While this is normal with bank earnings announcements, the (GS) report seemed to particularly sting.
“If Goldman can’t make money in this market, then how the heck can I,” many discouraged individual traders must be wondering.
And that is part of the problem.
Nevertheless, I still like Goldman Sachs, even though they used to rip my eyes out at every opportunity when I traded against them at Morgan Stanley (MS) during the 1980’s.
For a start, I am going to run my existing Goldman Sachs (GS) July, 2017 $205-$210 in-the-money vertical bull call spread into the Friday expiration in two days.
Those who followed me into this profitable Trade Alert won’t have to do anything.
As long as the stock closes above $210 at the Friday close, I will keep the entire $1,380, or 13.63% profit on the position.
The entire $5 expiration of the spread will be deposited into your account on Monday, and the margin freed up.
Such are the wonders of the vertical bull call debit spread trading strategy.
This is the generous profit we were able to reap when the stock moved all of eight cents against us in three weeks.
I love being able to make money, even when I’m wrong.
Longer term you can expect the share price to improve.
This is not your father’s Goldman Sachs (or mine).
It is no longer the clear play on the yield curve that it once was, a requirement that the shares can only rise when long term interest rates are much higher than short term ones.
Goldman is now more of a rising dividend play, and in a near zero interest rate world, the 1.35% they pay is worth quite a lot when it gets bumped up every quarter, especially to mainline conservative institutional investors.
And here is the problem with trading revenues. They are notoriously volatile, which is why the entire sector has traded at a discount price earnings multiple since they first went public all those years ago.
So what happen after a down quarter in trading profits? An up one, sometimes quite substantially so.
That is not a bad bet to make ahead of the notoriously volatile month of August, when we saw the (VIX) at $20.
All of this encourages me to predict that (GS) stock could double in three years from the current $223 level.
I’ll be in there again will more Trade Alerts to buy the stock, call options, call spreads, and the Financial Select Sector SPDR ETF (XLF) on the next swan dive.
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