Thursday, April 22, 2010

Is the News Sentiment improving for Goldman?

The bad news surrounding Goldman Sachs (GS) right now reminds me of when the Bank of England said they would support the Pound and George Soros bet that it would crater.   Someone was right and someone was wrong and there was a bit of noise afterward.  Successful traders see something where others don’t and then they act.  How many Wall Street CEO’S got canned for loading up on Sub Prime Securities?  It was fashionable to leverage a balance sheet for the easy carry trade in 2006.   A few successful investors saw this as unsustainable and bet against it.  Now Goldman is in the hot seat for facilitating a trade (bringing together a buyer and seller) when there were plenty of buyers of subprime securities at the time.    The news has been bad for GS in the short term and the system will take it’s course. In the meantime, let’s analyze the news since last Friday and see how that has effected option volatility for GS.  

GS Single Plate 
Above:  Each building represents a News Story as an item, so  you don’t have to sift through the news, the News Sentiment Scores from RavenPack when displayed in AlphaVision do that for you.  The tall, purple stories (Very Bad News Sentiment, High Market Impact Score) are the initial wave of bad news about the SEC investigation 5+ days ago.  Notice as you move to the lower left (closer to today) the subsequent Bad stories had less impact (shorter, purple buildings) and then the news turned to Neutral and downright Positive (green) because of Earnings and Revenues.  The flow of “new” bad news has slowed to a trickle.  What does that mean for the options?

At first on the big down move, the Implied Volatility in the options leapt last Friday.  No real surprise and it has been well covered.   Looking at the Option Landscape above as the week progressed, better news meant lower option volatilities by April 19th.  Taking a snapshot of option market activity at the end of the day, Red Buildings mean declines in Implied Volatility in the 2nd Month (Next Term) Puts (there was a one strike exception).  With this view representing mostly Out of the Money Puts , the decline was pretty consistent and shows a reduced perception of risk from the day of the SEC announcements to today.  The markets are digesting all the available information.  The effect of better news about GS is starting to push the volatility back down from its recent highs…at least for this week.

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