The stock market’s relatively low volatility has cheapened options trades that would profit from the big price swings that typically occur during earnings season.
A team of derivatives strategists at Goldman Sachs identify 20 stocks where earnings-related options strategies are cheap relative to history.
Click here for more BI Prime stories.
Despite its ascent to numerous record highs over the past few months, the stock market has been rather quiet beneath the surface.
This stretch of relatively low volatility has lulled investors into thinking that the next couple of weeks will also be calm, according to options strategists at Goldman Sachs.
In quantifying this lull, the team led by Vishal Vivek found that three-month implied volatility for the average S&P 500 stock is at 22, near a two-year low and in its 20th percentile relative to the past 15-plus years. In other words, traders are expecting well-below-average price swings.
This is a double-edged sword of complacency and opportunity, in their view.
The opportunity is that options trades which are used to hedge against risks or express directional bets have cheapened for many stocks. And as companies start to report their fourth-quarter earnings results this week, there’s a window of opportunity to enter these trades and profit from the outsized moves that this season brings.
Vivek and his colleagues identified 20 stocks with upcoming earnings where option prices are low relative to their historical moves on release day. They zeroed in on the earnings-linked straddle, a strategy which involves picking a stock and simultaneously buying its call and put option with the same expiration date and strike price.
For the average stock on this list, the straddle capturing earnings costs 30 basis points less than the historical one-day move on reporting day, Vivek said. In addition to the cost-specific advantage, the straddles on these stocks are prone to capturing volatility on trading days beyond the earnings release.
The list below shows stocks reporting earnings through February 7 where option prices are low relative to historical earnings-day moves. They have an average straddle cost that is 6.8% of the current stock price, even though the average stock has moved 7.1% over the past eight quarters.
In addition to the list above, Vivek singled out three companies that make for lucrative options trades this season:
This buy-rated stock was volatile last year and lagged the S&P 500. Goldman’s analyst Brett Feldman attributes its Comcast’s underperformance to investors’ lack of clarity on the financial outlook for Peacock, its streaming service.
The company could provide some details on Peacock content, distribution, and forecasted revenues at an investor meeting on January 16 and during in its fourth-quarter earnings release a week later.
In Feldman’s view, Peacock is differentiated from rival products like Apple TV+, Disney+, and HBO Max because it will offer a great deal of free, ad-supported content.
“We recommend buying the CMCSA $45 Feb-20 monthly calls, recently offered at $1.30 (2.9%, stock $44.93),” Vivek said.
Goldman anticipates that Amazon will …read more
Source:: Business Insider