April 16, 2010 / 7:05 PM / in 8 years

Option investors jump on Goldman slump

*Friday option volume on Goldman explosive as shares fall

*Traders scramble to adjust expiring April options

*May $170/$145 put spread up 300 pct from initial trades

By Doris Frankel and David Gaffen

CHICAGO/NEW YORK, April 16 (Reuters) - Option investors jumped on the plunge in Goldman Sachs Group Inc (GS.N) shares on Friday, with many taking bearish bets after the investment bank was charged with fraud.

Goldman shares lost as much as 15.6 percent after the U.S. Securities and Exchange Commission charged the company with fraud in structuring and marketing of debt products tied to subprime mortgages. For details, see [ID:nN16121493].

Action was heavy on a day when April option contracts expire after the close, and more investors appeared to take a bearish view on Goldman. In afternoon trading on the New York Stock Exchange, its shares were down 11.9 percent at $162.28.

“Option investors are taking advantage of Goldman’s pain today,” said Interactive Brokers Group equity options analyst Caitlin Duffy. “Excluding the frenzied trading in the April contracts, some are looking to profit by employing bearish trading strategies. Many pessimistic investors bought out-of-the-money puts.”

The lawsuit is a significant challenge for Goldman, which emerged from the global financial crisis as Wall Street’s most influential bank, and investors worried that the news could serve as a cloud over the industry.

“If I‘m an investor, why would I want to be in the financials?” said Chris Wang, portfolio manager at hedge fund SYW Capital Management LLC in New York, who bought put options in Goldman Sachs on Friday.

Option volume in Goldman was explosive as traders exchanged more than 600,000 contracts, eight times the average daily volume by late afternoon, according to option analytics firm Trade Alert.

In all, about 346,000 calls, which give the right to buy the stock at a preset price by a certain date, and about 293,000 puts, which carry the right to sell the shares, traded.

Most of the action was in the front-month April options as players scrambled to adjust their positions before the options expired, said Whatstrading.com options strategist Frederic Ruffy.

BEARISH BETS COULD PAY OFF

Some investors appeared set to profit handsomely from bearishly construed bets made last week in the May $170/$145 put spreads, which aim to profit if the underlying shares decline. A number of those spreads appeared to have been bought on April 8 and 9. For details, see [ID:nN09251914].

    Some traders appeared cautious heading into Goldman’s impending earnings report on April 20.

    The total net cost of the spread was about $3, making the trade profitable if the shares fall below $167 a share. But the spread now has quadrupled, according to Joe Kunkle, a founder of Web information site OptionsHawk.com.

    “The May GS $170/$145 put spread is currently priced at $12 per spread, up 300 percent from the initial trade placed on April 8,” he said. “That trade now equates to a profit of $13.5 million.”

    On April 8, Kunkle flagged the purchase of 15,000 of those spreads.

    Late last week, total May put open interest was more than double the amount of May call open positions as a result of the recent spread activity, Reuters data show, suggesting investors were getting cautious on Goldman.

    But it was not clear if the put spreads were initiated alone or against another position.

    “What you have to take into consideration on option trades is that there may be another side to the position. This person may have owned Goldman stock or have an index position or something else against it,” said TD Ameritrade chief derivatives strategist Joe Kinahan.

    “Either way, this particular put spread trade worked out very well for those investors. But it is impossible to know if that was the total sum of this position.” (Editing by Dan Grebler)

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