Earnings season is about to get underway, and it’s set to be one of the most important in recent memory, at least for stock traders.
Goldman Sachs has discovered a trading strategy that’s returned 26%, on average, over just a six-day period.
The upcoming earnings season is shaping up to be one of the most important in recent memory.
Stocks finally looks vulnerable after almost a decade in bull market territory, and dimming profit outlooks are a big part of that. Investors will be watching closely for signs of a quicker-than-expected earnings slowdown — a development that might make them reconsider owning equities at current levels.
Those cautious investors will be happy to know that Goldman Sachs has formulated an options-trading strategy designed to take advantage of the large price swings that normally accompany first-quarter earnings season.
How big are we talking? Goldman says earnings reports are currently moving stocks 4.4 times more than in average trading, which is well above the trailing 20-year mean. Not to mention the firm finds that more than 25% of annual corporate preannouncements — which are reliably market-moving events — come in January.
So what’s a trader to do? Goldman’s strategy is as follows: An investor buys the closest one-month straddle on a stock five days ahead of earnings, then closes it one day after the report. (Note: A straddle is an approach that involves the simultaneous purchase of a put and a call of the same underlying stock, striking price and expiration date.)
But there’s a catch. In order to qualify for the big returns Goldman has seen, the straddle must cost less than the earnings move being implied by the market. That’s a big qualification that narrows down the universe considerably.
On an average basis, the …read more
Source:: Business Insider