- With volatility back in the stock market, investors will be well-served to identify stocks that have the potential to outperform, while hedging their downside risk.
- Analysts at Goldman Sachs looked into options contracts to glean which stocks traders are making the most bullish bets on.
If the past few days have demonstrated anything, it's that volatility is back in the stock market and could remain through the end of 2018.
This makes it important for investors to gain exposure to stocks that could experience an end-of-year surge, coupled with strong hedges.
The options market is ideal for doing that, and analysts at Goldman Sachs have examined contracts expiring in January 2019 to glean what traders are making big bets on for the rest of this year.
They compiled a list of stocks that are among the cheapest to hedge on the market, as measured by three-month skew - or the difference between the premium options traders are paying to protect against price declines over the next three months relative to bets on increases.
"Very low levels of skew in options suggest investors are buying upside calls [options contracts betting on rallies] into year-end, or are less worried about downside risks," a team of analysts led by Katherine Fogertey said in a recent note to clients.
"As an example, options for Humana (Buy-rated) now reflect 3m normalized (put-call) skew is at its lowest level in a year. While shares are up 36% year to date, option investors appear to be positioning for the potential that recent outperformance can continue."
The list below shows stocks that options investors are betting will see huge gains by the end of the year. It's ranked in descending order of their three-month-skew percentile. As Fogertey noted, low skew means traders are less worried about risks, which implies greater upside.
Get the latest Goldman Sachs stock price here.