Reuters / Lucas Jackson
- Goldman Sachs says many stocks in the US market are mispriced considering how much they've moved on past earnings reports.
- The firm highlights five stocks it says will see anomalous fluctuations, and provides a specific options recommendation for each.
Stock investors have been waiting months for this.
No, we're not referring to a global trade war resolution - although that would be nice. We mean earnings season, which gives stock-pickers the opportunity to prove their bonafides as share moves become overwhelmingly dictated by oft-overlooked fundamentals.
There's big money to be made forecasting which stocks will move the most, and Goldman Sachs is here to help. The firm takes it a step further, and assesses which of those companies are attractively priced relative to history, and therefore offer good risk-reward profiles.
It's a "two birds, one stone" approach designed to give traders exposure to volatile stocks through options strategies that are trading at discount prices. And at the root of any good earnings strategy are options straddles, which involve the purchase of both call and put contracts. Basically, they're intended to profit from a big move, no matter the direction.
If that sounds overwhelming, fear not. Katherine Fogertey and the equity derivatives team at Goldman have gone through the trouble of identifying five companies that fit the bill - and provide specific trade recommendations for each. Here they are:
- Buy Yelp (YELP) May $41 straddles - This strategy captures Yelp's earnings report, plus 32 additional trading days, yet costs just 0.2% more than the amount shares have fluctuated after past reports. Goldman says this is too conservative given Yelp's earnings move in past quarters.
- Buy Valeant Pharmaceuticals (VRX) May $16 straddles - This is intended to position for a potential increase in earnings-driven volatility. Once again, the current pricing for the contracts is extremely attractive relative to history, and it captures 32 extra days.
- Buy Hasbro (HAS) $84 weekly straddles expiring April 27 - The purpose of this strategy is to both capture the company's earnings report, and play a potentially volatile quarter in the toy industry. Goldman analysts say Toys R Us' recent bankruptcy and store closures are sure to whip up price swings.
- Buy Infinera (INFN) May $11 straddles - As outlined above, Goldman says options aren't adequately pricing in the possibility of earnings volatility.
- Buy Seagate (STX) $57 weekly straddles expiring May 4 - Goldman says the potential for a stock-moving company update ahead of earnings creates opportunity.
Get the latest Goldman Sachs stock price here.