Monday, December 11, 2006

GS - Goldman Sachs

So here we are, less than a day before Goldman Sachs earnings - yes, 'not a creature was stirring, not even an Abby Joseph Cohen'. The game again is not whether GS beats the Street - for they surely will blow the doors and the hinges off the frame - but by how much beyond the estimate of $6.00 a share and what guidance they provide on what they will do for an encore in 2007 are the $64 questions. Wachovia has been out there saying they will post earnings of $6.20 a share. The folks buying the Dec230 lottery tickets... err, calls think GS will beat by more than $1 a share, which seems pretty wacky. The truth is somewhere in between, and with Goldman trading at a just 11x earnings, the argument can be made that not all of tomorrow's anticpated blow out numbers are baked into the price. It seems the safest bet is an in the money play either in December or January calls which is the route we're likely to take before the bell once we calculate the best bang for the buck in a few different scenarios.

A non event would be killer for so many buying out of the money calls all the way out to the December 240s... simply amazing, and insane. There are also plenty of put buyers - some, no doubt buying protection for their long stock holdings (sensible), but others buying out of the money puts in a daring bet against the Goldman locomotive... simply amazing, and even more insane.

While overall options implied volatility is floating at just below 30 - not far above its longer term average, other metrics are showing that high risk is priced into the picture. Take a December 200 straddle - priced at $10... that's a whopping $4 above it's theoretical value - without a doubt a red flag that tomorrow's numbers and guidance from GS needs to be outstanding. So we're only taking our customary 1/4 speculative earnings play position.... better to be a chicken that to bet the farm and be a dead duck!

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