Options playbook: Here are some earnings season plays and back-to-school bets

Published Sun, Jul 18 20218:41 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

After a relatively quiet few months on Wall Street and with major earnings and Fed meetings approaching, some traders may be looking for ways to bet on volatility in their portfolios. One way to do that is through various options strategies, including calls, puts and straddles. Here's a look at some of the options ideas that Wall Street has been talking about this week. Earnings season Many investors have the final week of July circled on their calendar, with some of the biggest tech companies in the world scheduled to report earnings. However, the derivatives team at Goldman Sachs said in a note on Wednesday that the options market seems to expect a quiet few weeks for stocks. "Options prices are low, despite our expectation for volatility on earnings-days. We believe investors have been lulled into complacency, likely driven by the low recent SPX realized volatility," Goldman said in a note. Stocks reporting later this month where options prices are implying smaller-than-average post report moves include Apple , Facebook and PayPal , according to Goldman. That gives traders the ability to make relatively cheap bets on potential volatility. The analysts did not take a position on which way to bet on the stocks, leaving it up to traders. "Investors can buy just the put or the call to express a directional view or buy the combination to express a view on volatility potential," Goldman said. Call options give investors the ability to buy a stock at the specified strike price before the expiration date, and the trade becomes profitable when the stock jumps above that strike price. Put options work the same way but in the other direction, serving as a bet that the stock price will fall. Buying both calls and puts on the same underlying security at the same strike price is called a straddle and is used to bet on a big move in either direction. Investors could also buy options with different strike prices, which may have cheaper premiums but run the risk of the stock finishing in between, making both bets unprofitable. For these options, the risk to investors is limited to the premium paid for the contracts. Back to school The U.S. may be in the middle of summer, but the back-to-school shopping season is just around the corner. JPMorgan strategist Shawn Quigg said in a note on Thursday that traders may want to put some Target options in their shopping cart. The firm recommended buying October $280 strike calls on Target, saying that the companies sales could gain steam in the third quarter. "We remain fundamentally positive on the stock given a view the company stands to be a key beneficiary/COVID-19 wallet winner with continued top line growth and margin upside, driven by strong back to school/work seasonal trends and lean inventories. Back to school typically peaks through September," JPMorgan said. That is a bet on a big move, with the strike price 12% above where the stock closed on Friday, but buying calls far out of the money can be a cheap way for investors to get exposure to upside. Chipmaker pair trade One type of strategic trade that professional investors use is called a pair trade. The process involves betting against one stock and on another in the same industry, theoretically hedging away sector-specific risk. Analysts at Citi identified such a trade in the semiconductor industry this week, saying in a note to clients on Thursday that they were growing bullish on Advanced Micro Devices and skeptical of Intel. "Given the upside of server market share gains at AMD and downside of server market share losses at Intel, we recommend a pair trade of Overweight AMD/Underweight Intel," the Citi note said. A typical pair trade from a hedge fund may involve buying one stock and shorting the other. However, truly shorting a stock is risky and not available to all investors. For those trying to make a directional bet with less downside, pairing a long position or call option on AMD with a put option on Intel might make more sense. One complicating factor in this trade is Intel's potential deal with Global Foundries. If Intel does agree to buy the company, the acquisition could be a bigger driver of the stock than the server market dynamic identified by Citi. Intel reports earnings this upcoming Thursday, while AMD will post results on July 27. -CNBC's Michael Bloom contributed to this report.

A sign is posted outside of the PayPal headquarters in San Jose, California.

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After a relatively quiet few months on Wall Street and with major earnings and Fed meetings approaching, some traders may be looking for ways to bet on volatility in their portfolios.

One way to do that is through various options strategies, including calls, puts and straddles.

Here's a look at some of the options ideas that Wall Street has been talking about this week.