Earnings season has the potential to be more lucrative than ever for stock traders, yet investors still haven’t caught on.
In recent quarters, reporting companies have seen their shares move four times the normal daily average, the most in the past 18 years, according to data compiled by Goldman Sachs.
Yet options are implying an earnings move of just 4.6% in either direction, near the lowest on record. So what traders should be doing, Goldman says, is placing strategic options bets designed to benefit from outsize fluctuations.
- Goldman Sachs
“The options market has not adjusted to reflect the increasing importance of earnings for stocks returns,” Katherine Fogertey and the Goldman derivatives team wrote in a client note. “We view this set-up as very supportive of buying options ahead of earnings.”
You’d think investors would be more keen to bet on earnings reports, especially with the US stock market so sapped of actionable price swings. The CBOE Volatility Index, or VIX, slipped to a 24-year low on Friday and remains locked near its lowest level on record.
Not to mention stocks are starting to see a bigger portion of their share moves realized during earnings week. In sectors like tech, materials, and consumer discretionary, more than 30% of quarterly returns have been generated in the five days surrounding releases, according to Goldman data.
That dynamic is even more pronounced for the so-called FAAMG stocks – Facebook, Amazon, Apple, Microsoft, and Google – which have seen more than 50% of their quarterly moves during their earnings weeks.
- Goldman Sachs
With all of this in mind, Goldman recommends the following nine earnings-related trades:
- Buy eBay straddles expiring July 20 Buy Microsoft calls expiring July 20 Buy Visa calls expiring July 20 Buy Texas Instruments straddles expiring July 25 Buy Teradyne calls expiring July 26 Buy Amazon straddles expiring July 27 Buy Expedia straddles expiring July 27 Buy L3 Technologies calls expiring July 27 Buy Nvidia calls expiring August 10