An earnings season that has been better-than-feared and a relatively calm stock market has led to big gains for a simple options strategy, according to Goldman Sachs. Vishal Vivek of Goldman’s derivatives research team said in a note to clients on Wednesday that the implied volatility for stocks around earnings has been falling in recent weeks, making a simple strategy of buying call options a winner. “Buying calls ahead of earnings for the average U.S. stock with liquid options has yielded +29% return on premium,” so far this quarter, the note said. A call option is a contract that gives the holder the right to buy a stock at a set strike price. Investors can buy a contract with a strike price slightly above a stock’s current market price and potentially profit if it rises above that level. When implied volatility is low, the premium paid for the options contract is relatively small, creating even more upside for the trade. The risk for investing in a call option is capped at the price of the premium for the contract. Two stocks with upcoming earnings reports that could be good candidates for this strategy are breakfast cereal maker Post Holdings and agribusiness company Bunge , Goldman said. Post will report earnings after the bell on Feb. 2, while Bunge will announce on the morning of Feb. 8. Both stocks have underperformed the S & P 500, and have bullish outlooks from Goldman analysts. For Post, analyst Jason English believes the “all-in fundamentals for the company appear to be on their firmest footing in years despite its bottom-tier valuation,” the note said. POST 1M mountain Shares of Post have struggled to find traction in 2023. Another way for investors to take advantage of low implied volatility is to go long on straddles, Goldman said. A straddle is a trade where an investor buys a call option and a put option on the underlying stock, meaning that the trade can make money if the stock rises or falls. “We see value in selectively buying straddles on stocks where option prices appear low relative to their historical” earnings-day moves over the past eight quarters, the note said. Three other companies with low implied volatility are Avis Budget , Snap and Bill.com , according to Goldman. Snap will announce its latest results on Jan. 31, while the other two companies are set to report in February.
© heardonwallstreet.com