Goldman Says Buy Puts Because U.S. Stocks May Resume Retreat

By Jeff Kearns
     Feb. 2 (Bloomberg) -- Investors should buy put options on
the Standard & Poor’s 500 Index because the benchmark for U.S.
stocks may fall back to the 11-year low it reached in November,
Goldman Sachs Group Inc. said.
     “Dismal” fourth-quarter profits and forecasts from companies
as well as waning investor confidence in President Barack Obama’s
economic stimulus plan may drive the S&P 500 toward 752.44 in the
next month, Goldman strategists said.
     For investors using a “put spread” strategy, the highest
payoff would be generated through buying March 825 puts and
selling March 745 puts, Krag “Buzz” Gregory and John Marshall
wrote in a report distributed to clients today. That trade would
produce $1.85 in profit for every $1 invested should the S&P 500
drop to its November low, they said. The index declined 0.1
percent to 824.94 at 1:14 p.m. in New York today.
     “If the index continues to grind lower, put spreads look
attractive given the current volatility landscape,” the New York-
based options strategists said. “Put spreads have higher payout
ratios than outright put hedges given elevated volatility.”
     The U.S. economy probably shrank this quarter at a faster
rate than the 3.8 percent annual pace in the final three months
of 2008, according to Goldman Sachs economists.
     “Our U.S. economics team sees little evidence that the
downward spiral is abating,” the options strategists wrote.