Reuters / John Gress
- John Marshall, a derivatives strategist at Goldman Sachs, thinks crowded trades and a quiet options market are setting the stage for an extremely volatile second-quarter earnings season.
- He identifies and details 25 individual trades to profit from out-of-whack investor positioning.
- Click here for more BI Prime stories.
Batten down the hatches, earnings season is upon us.
On the heels of slowing global growth and trade-war fears, S&P 500 earnings estimates have been forecast to fall 2% in the second-quarter, with small-cap earnings projected to drop 12%. All eyes are on the earliest reporters, as investors desperately try to gauge sentiment and fervor surrounding what's been touted as a choppy, volatile road ahead.
But those who are positioned correctly stand to reap the rewards - and Goldman Sachs thinks they've identified the 25 out-of-consensus trades that will benefit most. The nature of their calls has been attributed to crowding in certain trades and historically low implied moves in the options market.
"Investors appear to be crowding based on defensive technical factors; buying low volatility stocks and selling stocks that are already heavily shorted," John Marshall, a derivatives strategist at Goldman Sachs, wrote in a note to clients.
He says key imbalances are setting the stage for what could be a large divergence between expectations and reality.
Marshall continued: "Options imply a +/- 3.9% move for the average stock on its earnings day this season. This is the lowest average implied move on record over the past 13 years, implying investors are not well-hedged for earnings. Our studies show that low implied moves limit the potential for relief rallies on earnings."
The charts below depict just how volatile moves in stocks are on earnings day.
GS
In addition to crowding and low implied moves, Marshall highlights increasing levels of volatility to bolster the case for his top trades.
"Earnings day moves increased over the past 20 years and remain elevated over the past two quarters," he said. "With options prices at unusually low levels, we would remain focused on buying volatility for known earnings events as they remain large predictable sources of volatility."
In other words, there's an opportunity present that's ripe for investors to take advantage. The stage is set for large moves. And if investors position correctly, they should be able to reap the rewards of these circumstances aligning.
Without further ado, here are Goldman Sach's top 25 tactical trades for second-quarter earnings season. The type of option, strike price, and cost are outlined in the three rightmost columns. Bear in mind that these levels are moving targets.
GS
Get the latest Goldman Sachs stock price here.