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The Goldman Sachs Group Inc Rally Is Due for a Rest — Profit Anyway

Tyler Craig

Tech’s pain has been financial’s gain. So says the story of sector rotation this week. While the technology sector finally received its comeuppance, financial stocks were flying across the board. Indeed the Financial Select Sector SPDR Fund (NYSEARCA:XLF) was one of the biggest beneficiaries of the recent tax-cut rally. But its overbought status suggests some cooling is in order, and that has me eyeing a bearish trade in Goldman Sachs Group Inc (NYSE:GS).

GS Stock: The Goldman Sachs Group Inc Rally Is Due for a Rest -- Profit Anyway

Source: Shutterstock

XLF has galloped higher by 7% over the past week amid heavy accumulation. GS matched its sector’s gain with a 7% pop of its own. But yesterday’s bearish reversal warrants caution in the short run. The gap higher was aggressively sold into creating a dark cloud cover candlestick. It’s an ominous-sounding formation, to be sure, and signals buying pressure is drying up.

And why shouldn’t it be? GS stock and the broader financial sector are a touch overbought following such a large gain and therefore deserving of a pause.

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Source: OptionsAnalytix

This morning’s slide in GS is confirming yesterday’s reversal candle and leads me to believe we could be in for some choppy sideways action for a spell.

At the same time, demand for Goldman stock options is running hot. Its implied volatility rank recently lifted to 44% which is one of the highest readings seen this year. And that means option sellers are being paid handsomely for their wares.

GS Iron Condors Take Flight

A neutral outlook and higher implied volatility create an attractive opportunity for selling an iron condor. This strategy involves entering a bull put and a bear call spread simultaneously with the hope that the underlying remains in a range.

Sell the Jan $220/$225 bull put and $270/$275 bear call for a net credit of 93 cents. Consider this a bet that GS stock sits between $225 and $270 at expiration. If it does, you will capture the max reward of 93 cents. The initial cost (and risk) is $4.07 and will be lost if the stock falls below $225 or rises above $275. To minimize the damage on an adverse move, I suggest exiting on a break of either short strike price ($225, $270).

As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

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