Goldman Sachs has a recommendation for how stock investors can use options on depressed stocks to make money during corporate earnings season.
- Earnings season is here, and Goldman Sachs has some money-making ideas.
- Their recommendations involve options trades on single stocks that are designed to capture potential gains in share prices.
We all know the old adage: buy low and sell high.
That's exactly what Goldman Sachs recommends for stock traders heading into earnings season — except their suggested method involves options.
The focal point of their strategy involves identifying downtrodden stocks with strong fundamentals since they'll be the most likely to spring higher in the event of a better-than-expected report,
The firm says to buy calls — or bets a stock will rise — on companies with either buy or neutral ratings that have underperformed the S&P 500 by 3% or more in the two weeks ahead of earnings. Dating back to 1996, implementing this strategy would've yielded a 17% return, Goldman finds.
Getting further into the mechanics of the strategy, Goldman recommends buying one-month call contracts with exercise prices that are higher than where the stock is currently trading.
The bank's analysts have constructed a list of the 19 companies that best fit these criteria:
But the firm's suggestions don't stop there. They also offer up three specific options strategies for stocks they think could be more volatile than is presently priced:
- Buy GE puts expiring in November to hedge October 20 earnings and November 13 analyst day risks
- Buy WHR (Whirlpool) October 27 straddles for October 23 earnings and potential news from the International Trade Commission regarding the company's quest to stem competitor appliances from flooding the US market
- Put AMD October 27 puts for earnings on October 24
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