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Has Goldman Called The Market Top: GS Sells $3.1 Million Leveraged Index-Linked Notes Referenced To 1123.7 On The S&P
Either Goldman is desperate to raise $3.1 million (it's not), or the firm is offering investors a 300% leveraged surefire way to make money in a rising market via an investment in Leveraged Index-Linked (interest-free) Notes due 2011. Or, most likely, a third alternative - for others to profit, Goldman would have to lose, which is an amusing and quaint proposition (link to Goldman's 2009 profitable trading days here). The only way Goldman will not lose money on this issue is if the S&P closes below 1,123.7 on May 23, 2011 (the determination date). This has led some to question - is 1,123.7 a market ceiling according to this March 1, 2010 bond issue? To be sure, the notional is minor (however, more can always be tacked on), but someone's P&L, and thus bonus, will be determined on how these notes perform vis-a-vis Goldman, not investors.
The notes generate a return based on where the S&P closes on May 23, 2011: the higher, the better (if you are an investor). Investors are capped at a maximum payout of 118% of face, while their downside is unlimited (or 100%). The sweet spot is between the 100% and 118% return, where S&P returns are leveraged three fold, as can be seen on the chart below.
In essence the notes are synthetically equivalent to a covered call less the premium from selling calls. The benefit to Goldman - no need to be an options market maker on the ISE/CBOE, while in essence being an option market maker.
So what is the paydown to Goldman? The firm stands to lose the most if the market moves higher by 6%, after which it is indifferent for another 12% as max pain has been incurred, and furthermore its downside is capped.
Yet the only way Goldman makes money on this trade is if the market drips lower from the initial underlier level, or in this case, an S&P level of 1,123.7.
While in itself this trade is hardly substantial to make a bet on how Goldman is truly positioned in the market (as opposed to what its "strategists" Cohen and O'Neill would like you to believe), in combination with Goldman's recent major increase in SPY holdings, which implies the firm is net short underlyings (at least on the surface), one could make the case that Blankfein's firm sees the broader market substantially lower in one year.
We haven't gone through the risk factors yet. Those will likely be a hoot.
h/t Praveen
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Could just be hedging a long...
So they hedged it--the entire float is less than Lord Blankfein's expense account for the quarter.
Let's not forget how nimble GS can be.
While those who can decipher, as you just did, may take this as a given, GS may have calculated that this will be visible and depending on what kind of action the market gets, may reverse bets or place hedges of the opposite happening.
Hence, I would monitor this only as an intellectual exercise.
Can you call a market top if you are also forcing the market top?
At that point aren't you just stating your own actions?
I don't see 3 million here or nothing more than a weekend party with escorts in the Belize for Goldman top brass a mkt top signal.
Lately, it seems as if WOPR's been switched to the sell side after volume dies down.
$3m barely pays the hookers working shifts under Lloyd's desk.
"The only way Goldman will not lose money on this issue is if the S&P closes below 1,123.7 on May 23, 2011 (the determination date)."
This is totally wrong, they are selling SPY at 1123.7 plus selling a call on 2x notional at 1123.7 and buying call on 3 x notional at 1191.12. To imply they would not hedge this product is not something I would expect from zerohedge...
It is not shocking. This site is wildly predisposed to finding any reason to knock GS. It appears to be their mission in life. Even on a $3 million rounding error trade. They are desparate for content!
Thanks for the simpler explanation!
Correct, this is just the filing for a small structured product issuance. In this case, product is a simple linear combination vanilla options. GS throws them in w the rest of the customer-facing derivatives business and hedges as a portfolio. Nothing every investment bank doesn't routinely do every day.
So who here is buying these?
So who here is buying these?
I doubt that the principal remains unprotected. Why would anyone accept a capped return without getting something in return?
GS immediately hedged the exposure and banked a fee. That's how structured notes work.
They likely sold the cap on the S&P because they were given it by the investor, implicitly. Either that or they have hedged the exposure with some form of barrier options instead of vanilla ones.
In any case the calls (or whatever mechanism they chose for replicating the SP500 returns) are paid for by the barrier /sale of cap and the interest that can be earned on the principal - probably parked in as near risk free as possible.
And a fool and his money part ways...
dollar amount is laughable.
Uhhh... there are literally dozens of these types of structured products already trading tied to many different indexes, at many different benchmark levels, issued by many different banks.
But sure, I guess this one ($3 million!!!) is somehow significant...
"risk free" -- that's funny.
You can get more accurate than the buywrite. With the SPX at 1120, doing this is the equivalent of buying a future, buying two 1120 calls and selling three 1187.2 (6% up) calls (if you could find trading on those lines/expos). If the value of that 2x3 spread is a credit to selling the 3 side, then whatever that credit is, that's the edge GS should expect to bank on this.
But this note is so small, who fucking cares? All structured products are shit, and they never represent any bank's intentions. They're usually such a ripoff from 'fair value' that banks don't give a shit whether or not they put on a bad position, since it's pretty easy to hedge away the relevant risks in the SPX market at the CBOE, and still pocket some free cash.
A $3 mil note?
Thats lunch money. I don't get it.
Let’s take a close look at the anatomy of the Vampire Squid. You will certainly agree it is unlike any other creature you have ever seen. How many can actually turn their bodies inside out? You will notice that there are suckers found on the arms of the Vampire Squid. They help them to be able to reach out for prey and to ensure that they can’t escape. They have extremely large eyes that can become red in color. Under close examination when cornered, the top of their bulbous head becomes especially shiny; they tend to exhibit preening behavior and become sexually aroused, especially when lying, which is all the time.
" . . . which implies the firm is net short underlyings (at least on the surface) . . . "
The Squid doesn't often come to the surface, me thinks. Given the notional, what kinda bullshit is this, anyway? Perhaps a Graduation gift for someone's kid . . . maybe the dumb-ass kid who is slacking and needs a little incentive to finish up next year?
I'm at a loss. Perhaps you're a media fish being fed, Tyler! Wonder what Marla thinks . . .
Yet the only way Goldman makes money on this trade is if the market drips lower from the initial underlier level, or in this case, an S&P level of 1,123.7
Ummm, no. They hedge the upside risk to be delta neutral and collect the fee for providing the note. Risk free profit.
Word
http://www.youtube.com/watch?v=gwqLTxL0KdY
ratigan unzips his fly.
are there anymore questions about what this guy really is?
he is just controlled opposition. always was and always will be. i said this a long time ago and now the chickens
have come home to roost. if you don't believe me, then listen to his very words. with them he condemns himself to be the enemy he really is and always was. the lesson to be learned for some is that for the most part, there is no real open and honest media. it is all controlled by the same people who tell their hosts , etc, what to say.....
Way overboard on sensationalism. Many banks and brokerage firms have been selling these notes for years, in denominations manifold the amount here. Go jump another shark ZH.
Some other people above have already pointed out how stupid some of the conclusions are of this article.
Almost all firms on the street write these types of notes to give PWM clients leveraged derivative products. All the firms stay hedged and make money off the sales commission.
Please try harder next time ZH...
I don't get the issue here. GS will just close the market where it wants it to be on determination day.
Options have prices and hedging costs money. It's fine to show off by conjuring up a risk free trade for Goldman as an abstraction, but it ain't always so easy at any given moment to lay a hedge on and have some profit left over.
Do the wise guys criticizing TD and ZH really think that Goldman never makes directional bets? That Goldman's huge '09 earnings were made on nickel and dime post-hedging-cost commissions and not on directional bets??
Pseudo sophisticates all!!
Do the wise guys criticizing TD and ZH really think that Goldman never makes directional bets?
Of course they don't think that. This is just one of those lame times that everybody has. It looks like ZH got sent on a snipe hunt. This would be something that ZH would need to be alert to . . .
Tyler still gets plenty of love. I hope Marla is not missing any, either!
Options have prices and hedges cost money. It is one thing to show off by conceptualizing a risk free set of trades ans a theoretical abstraction, but in any given hour of a trading day it may not be so easy to pay up for those hedges and have any profit left.
Do all of you pseudo sophisticated critics of TD and ZH really believe that the Squid never makes directional bets such as this structured note? - that all of the Squid's huge '09 earnings were made from nickel and dime after-hedging-costs sales commissions?
Do you really believe that there are unlimited numbers of suckers out there continuously willing to under-price the risks that the Squid is laying off on them?
GS can trade these notes as well, and get options on them too.
My uneducated guess is this is either a structured bribe or a bonus payment.
Head of structured finance group asked for a larger bonus, was semi-rejected and told to structure it himself, and we (GS) will provide you with 0% loan to buy some notes.
Options have prices and hedges cost money! It is one thing to show off by thinking up a hedge for a structured note as a conceptual abstraction, but purchasing (and selling) those options at any given hour of the day at prices that leave some profit on the table can be quite a different matter!
Do you sophisticates criticizing TD and ZH really believe that the Squid made its huge '09 profits without making directional bets? - that those profits came from nickle and dime post-hedging-cost product sales?
Do you really believe that there are an infinite number of suckers out there continuously ready to under-price the risks that the Squid is laying off on them?
Goldman sells $3.1 million dollars worth of anything shouldn't make news. $3.1 million to GS is like the lint in my pocket.
I'd like to pile on. But there are already a large number of comments that this post is BS. Can't add anything more except this post is BS.
They sell the note, which has an embedded S&P position plus sold call, and hedge out the payoff for less money than they are charging. This is not a directional bet for them. Plus, as it is a note, and funded upfront, it is cheap funding for the firm.
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