These options plays can take advantage of earnings season volatility, Goldman says

Published Wed, Apr 14 20212:41 PM EDT

Jesse Pound @/in/jesse-pound @jesserpound

As earnings season heats up, there are several underperforming stocks with an opportunity to catch up to the market and benefit options traders, according to Goldman Sachs. The firm's derivatives research team identified buy-rated stocks that have underperformed the market by at least 6% over the past month to identify potential "relief rally" candidates during the earnings period. "The sharp rotations in equity markets this year have created significant opportunities for stock picking," Goldman said in a note. "While macro concerns such as interest rates, inflation and uncertainty related to COVID-19 cases and vaccines have weighed on many stocks, we believe earnings events can remind investors that fundamentals ultimately drive sustained stock performance," the bank said. One stock on the list that reports earnings this week is Morgan Stanley , where Goldman's financial services analyst sees 10% upside over the next year entering Wednesday. Morgan Stanley's quarterly earnings will be released on Friday, April 16, and the market does not appear to expect a big move off of the report. "MS one month implied volatility of 30 is only in its 10th percentile relative to the past year, implying muted positioning ahead of key earnings," Goldman said. The firm recommended buying May calls with a strike price of $80 per share for Morgan Stanley. Call options are trading instruments which allow the holder to buy a stock at a specific price, called the strike price, before expiration. They become more valuable as the stock goes up. Another recommend call option from Goldman is Activision Blizzard . The stock has been trading sideways since mid-February. The firm's video game analyst projects a strong quarter from Activision Blizzard's "Call of Duty" franchise that could fuel a beat and raise for the company. Goldman's derivatives team recommends buying May calls at $97.50 per share. One different strategy than simply buying calls is a straddle, where a trader buys a call and a put at the same strike price for the same expiration date. Put options give an investor the right to sell a certain amount of shares at a specified price–the strike price. Puts become valuable when the current market price of the stock is below the strike price. Straddles may make sense if the trader thinks the market is undervaluing potential volatility, but isn't sure which way the stock will move. The straddle strategy appears attractive for AT & T ahead of the telecom company's upcoming earnings report, Goldman said. "T options implied moves are below historical earnings-day realized moves, despite the potential for volatility at the upcoming earnings event," the note said. The firm recommended buying a straddle of May options with a $30 strike price.

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"The sharp rotations in equity markets this year have created significant opportunities for stock picking," Goldman said in a note.

"While macro concerns such as interest rates, inflation and uncertainty related to COVID-19 cases and vaccines have weighed on many stocks, we believe earnings events can remind investors that fundamentals ultimately drive sustained stock performance," the bank said.