Goldman Sachs might be finding a floor

Goldman Sachs Group Inc. (NYSE: GS) opened at $199.80. So far today the stock has hit a low of $197.78 and a high of $203.36. As of 10:55 this morning, GS is trading at $199.63, up $1.48 (0.7%).

After hitting a one year high of $233.97 in May, the stock has been dropping over the past two months. Following a recent sharp decline, spurred by the collapse of a couple of hedge funds at Bear Stearns (NYSE: BSC) and continuing subprime fears, some analysts are saying that the big banks are due for a bounce. They appear to be getting just that today, as most of the big financial stocks were up between 1 and 2% this morning, but are sliding again as the day wears on. Technical indicators for GS are bearish and steady, while S&P gives the stock a very positive 5 STARS (out of 5) strong buy rating.

Personally, I am not convinced that we have hit bottom yet. However, with a strong S&P rating, I feel comfortable placing a trade that has another 12% downside protection on top of the drop we have already seen. For a bullish hedged play on this stock, I would consider an August bull-put credit spread below the $175 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk and leverage returns. For this particular trade, we will make a 4.2% return in just 24 days as long as GS is above $175 at August expiration. GS would have to fall by more than 12% before we would start to lose money.

GS hasn't been below $175 since October and has shown support around $196 recently. This trade could be risky if financial stocks continue to drop, but even if that happens, it looks like this position could be protected the strong support the stock found between $185 and $190 in March.

Brent Archer is an options analyst and writer at Investors Observer. DISCLOSURE: At publication time, Brent neither owns nor controls positions in GS or BSC.