GOLDMAN SACHS: Here’s how to make a killing this earnings season

This guy clearly followed
Goldman’s advice and bought straddles heading into earnings
reports.
AP Images / Richard
Drew

All earnings seasons are an
ideal time to make money trading stocks. Investors are given a
huge load of tradeable information, and the resulting price
swings create major opportunities.

But there’s something particularly special about the third
quarter that conjures up stock movements not seen throughout the
rest of the year, says Goldman Sachs.

This is likely because it’s the period in which companies provide
the most forward guidance. It’s also possible that the seasonally
heavy demand for tech and consumer
discretionary — two massively influential industries — have
investors playing particularly close attention, the firm says.

So with all that opportunity for profit, what’s the best way to
ensure you cash in?

It’s simple: buy straddles.

Straddles involve the purchase of both call and put contracts. If
the stock price moves up dramatically, a trader can use the call
option to buy shares at a big discount, while if the price drops
far enough, the put option will instead turn a profit.

There’s just one catch, however. The straddle should cost less
than the implied earnings-related stock move, Katherine Fogertey
and the Goldman derivatives team wrote in a client note on
Wednesday.

To reach this conclusion, they sifted through more than 25,000
corporate earnings reports since
1996. The team found that investors that bought straddles five
days before earnings, then closed those positions the day after
the report, would’ve made an average profit of 24%, with a
success rate of 56%.

“This is significantly greater than the returns from buying
options on all stocks broadly regardless of this signal,” said
Fogertey.

While Goldman’s recommendation is just one way to trade earnings
season, it’s hard to argue with those results. So before you go
digging through those financial statements for the hidden nugget
that will unlock huge future gains, consider making things a
little easier on yourself by buying straddles.

Earnings season kicks off on Thursday, as Citigroup and JPMorgan
report results, followed by Bank of America and Wells Fargo on
Friday.

Get the latest Goldman Sachs stock price here.