- Goldman Sachs has formulated a strategy for earnings season that has provided outsized returns for the past two decades.
- It involves the purchase of options straddles that are cheap relative to history, and capture a company’s earnings period.
- The firm provides a list of 20 well-positioned companies, including Netflix, Microsoft, Procter & Gamble and Wells Fargo.
Earnings season is upon us, and if Wall Street forecasts are to be believed, it should be a joyous occasion for stock investors.
But if you really want to crush it, Goldman Sachs has a strategy for you — one that’s been a true money-maker for more than two decades.
It centers around buying options straddles, which involves the purchase of both call and put contracts. If a company’s stock price moves up dramatically, a trader can use the call option to buy shares at a big discount, while if the price drops far enough, the put option will instead turn a profit.
And that’s just part of it. Goldman isn’t recommending any old straddles — it’s only interested in those that both capture an earnings period, and are also cheap relative to past moves.
The strategy goes as follows: if the closest listed at-the-money straddle for a stock is less expensive than it has been historically, buying it five days before earnings and closing it the day after has produced an average return on premium of 24%. That dwarfs the 2% return for the entire universe of stocks.
As the chart below shows, the price of cheap straddles is even lower than usual heading into this earnings season:
With that established, Goldman has gone a step further and identified 20 stocks whose straddles are attractively priced for their upcoming earnings reports. Here are two specific options trades Goldman recommends, followed by a list of the other 18 companies:
1) Buy IBM (IBM) January $ 165 straddles — It captures the company’s upcoming earnings report and an additional six trading days, but costs 20 basis points less than the amount the stock has moved over the past eight quarters.
2) Buy Microsoft (MSFT) weekly $ 88 straddles expiring on February 2 — This allows an investor to position for a possible spike in earnings volatility expectations. It also costs just 0.2% more than the average over the past eight quarters, despite capturing 16 extra days.
And the 18 other stocks for which Goldman Sachs says it’s worth pursuing similar straddle strategies:
- Wynn Resources (WYNN)
- Royal Caribbean Cruises (RCL)
- Edwards Lifesciences (EW)
- Yelp (YELP)
- eBay (EBAY)
- Bank of New York Mellon (BK)
- Kinder Morgan (KMI)
- Akamai Technologies (AKAM)
- Netflix (NFLX)
- Hasbro (HAS)
- FireEye (FEYE)
- Corning (GLW)
- Xilinx (XLNX)
- CSX (CSX)
- Procter & Gamble (PG)
- Wells Fargo (WFC)
- TransDigm (TDG)
- Las Vegas Sands (LVS)
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