A options strategy this earnings season would have netted short-term traders an eye-popping 88 percent return, according to Goldman Sachs. That's the largest return since the firm started tracking this method nine years ago and well above the 11 percent return it typically yields.
"We find that stocks have traded up on earnings, even in a challenging market backdrop and when macro has slowed," Goldman equity derivatives strategists Katherine Fogertey and John Marshall said in a note Thursday. "This magnitude of earnings move is higher than we have observed since the financial crisis."
The strategy is to buy the closest out-of-the-money call option five days ahead of a company's fourth-quarter earnings report and then selling it a day after. Call options are a contract giving investors the right to buy a stock at a strike price within a set period of time. So if the underlying stock price jumps above the strike price (e.g., following a positive earnings result), the trader profits on the difference between the strike price and the market price.
That strategy has paid off so far this season, with nearly 70 percent of reporting S&P 500 companies posting better-than-expected profit. The reward for topping estimates has been sizable with big moves coming off those beats. As CNBC noted earlier this month, the average stock performance in reaction to earnings was the best in nine years.
To be sure, options are a contract and can expire as worthless, so this strategy is not for the faint of heart but is used mostly by sophisticated traders who can afford the risk.