Earnings season is getting started, providing plenty of potential opportunities for options traders.
Unlike buying or selling stocks outright, trading options allows investors to express much more specific viewpoints. In the context of earnings, that means that traders can bet a stock will rise or fall specifically on the news event, or that it will make either a larger or a smaller move than the market is expecting.
For this earnings season, Goldman's options research team suggested four trades in a Wednesday note to clients: Buying bullish call options on PepsiCo, buying bullish call options on Dow Chemical, and buying "straddles" on semiconductor stock Sanmina and on networking company JDS Uniphase.
A straddle is a trade composed of buying both a put option and a call option, and it is designed to profit if a stock moves more than implied by options prices.
So far, the trades have gotten off to a rough start. Pepsi shares fell Thursday after the company reported earnings, which has led the July 96.50-call that Goldman suggested buying for $1.18 to lose three quarters its value.
With Dow, Sanmini and JDS Uniphase yet to report, the wisdom of the remaining trade ideas remains to be seen.
More generally, one might notice that each trade idea proposed by Katherine Fogertey and John Marshall of Goldman involves buying options, not selling them. That's because they claim to spot a trend that the market is missing.
"Since 2011, we have noticed that preannouncement activity has picked up in July, but we think that the options market is missing this historical pattern," the options experts wrote. That should increase the prices of some options covering the July period, since "Investors that buy these options could benefit if a company preannounces results, but likely does not suffer significant decline in implied volatility if this does not occur since the options still capture earnings."
In other words, the now-increased chance of seeing a company provide news regarding its earnings before the actual event should boost the value of options, since it adds an additional potential catalyst, but the options market isn't accurately increasing the value of options to adjust for this opportunity, according to Goldman.
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