Reuters / John Gress
- Stock-market price swings have been subdued leading up to earnings season, but Goldman Sachs has still identified a handful of mispriced market opportunities.
- The firm offers specific options-trading recommendations for five single stocks as their earnings approach: Amazon, Arista Networks, Caterpillar, ConocoPhillips, and Tesla.
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As options strategies make up a growing portion of overall stock-trading volume, the message is clear: get on board, or get left behind.
Strategists at Goldman Sachs note that 55% of the stock market’s average daily notional trading volume is done through options, up from 30% in 2016.
"Mutual funds and systematic investors have increased their use of options selling strategies, while hedge funds and retail investors are increasingly buying options to position for the large stock moves on catalysts," a group of Goldman derivatives strategists led by John Marshall wrote in a client note.
They continued: "The growth in volumes opens up opportunities for even large investors to use options to manage risk and access liquidity at a time when shares liquidity has been challenged."
As you can see in the chart below, that 55% isn’t a record, but it’s still well above the measure’s average over the past 13 years.
Goldman Sachs
Goldman has formulated a handful of single-stock option recommendations designed to take advantage of what the firm sees as mispriced opportunities.
"Options prices are low across the majority of single stocks ahead of this earnings season," Marshall said. "For investors with a view that an upcoming catalyst is likely to move a stock in a meaningful way, option buying strategies appear unusually attractive."
And, as it turns out, those trade suggestions include ones for companies like Amazon and Tesla, among others. The five of them are as follows (all quotes from Marshall):
(1) Amazon
Trade: Buy AMZN Apr-26 weekly $1,865 calls recently offered at $44.10
Fundamental rationale: "Goldman Sachs internet analyst Heath Terry sees 13% upside to Buy rated AMZN over the next 12 months. He believes AMZN represents the best risk/reward in Internet, given the relatively early-stage shift of workloads to the cloud and the transition of traditional retail online."
Pricing rationale: "We believe AMZN options are inexpensive as 1-month implied volatility is below its average level over the past year and options are implying a move of +/-4.0% vs. 8Q average earnings move of +/-4.5%."
(2) Arista Networks
Trade: Buy ANET May-3 weekly $330 calls for $14.60.
Fundamental rationale: "Our analysts expect consensus estimates to be raised following results; we see calls as unusually attractive to gain exposure with limited risk."
Pricing rationale: "ANET 1 month implied volatility of 42 is below the peaks ahead of prior earnings releases and only at median levels relative to the past year. This suggests that investors are not positioned for a large up-move this quarter."
(3) Caterpillar
Trade: Buy CAT May-3 weekly $143 calls for $3.70.
Fundamental rationale: "Goldman Sachs machinery analyst Jerry Revich raised his 2019 EPS estimates ahead of earnings, and expects a bullish tone at the analyst meeting, with management potentially revising margin targets to the 15-17% range."
Pricing rationale: "CAT stock has historically moved +/-5.5% on the day of earnings, and +/-1.5% on analyst days, but options are only pricing a +/-5.8% move through 3-May. CAT 1-month implied volatility is currently 28, 4 points below recent realized, despite these upcoming catalysts."
(4) ConocoPhillips
Trade: Buy COP May-3 weekly expiry $66 calls recently offered at $1.54.
Fundamental rationale: Goldman Sachs integrated oils analyst Neil Mehta says "COP is a free cash flow winner, able to cover its dividend and capital spending as long as Brent is $45-$50/bbl." He also says "long-term growth opportunities are underappreciated, including Alaska, Australia and Qatar."
Pricing rationale: "We believe the COP call options are underpricing the potential upside on earnings as COP 1-month normalized skew is at an elevated level and 1-month implied volatility is below its average level over the past year."
(5) Tesla
Trade: Buy TSLA Jun-21 $270 straddles recently offered for $47.40.
Fundamental rationale: "TSLA is holding an autopilot analyst day (22-Apr) two days before their regularly scheduled earnings report (Apr-24). We expect the autopilot analyst day to increase the debate on their technology and the earnings event to reinforce the earnings uncertainty."
Pricing rationale: "TSLA 26-April straddles that capture both events cost 9.4% vs. a move of +/- 7.2% on average for the past 8 earnings events. There is limited history regarding volatility on analyst days, but we think that the additional 2.4% volatility priced in for the analyst day is too little."
See Also:
- GOLDMAN SACHS: A trade crucial for stock-market survival is the cheapest it’s been since before the financial crisis. Here’s how you can get involved.
- The world’s largest hedge fund just warned that the ‘most pro-corporate environment in history’ is in danger — and said the fallout could send stocks plunging
- Even the world’s top firms pay Rob Arnott for advice. He explains why a $1 trillion investing industry is built on a flawed premise — and why that’s hurting retirement savings.
Source: Business Insider – jciolli@businessinsider.com (Joe Ciolli)