Earnings season is about to get underway, and it’s set to be one of the most important in recent memory, at least for stock traders. Goldman Sachs has discovered a trading strategy that has returned 24%, on average, over just a six-day period. The coming earnings season is shaping up to be one of the most important in recent memory. Stocks finally looks vulnerable after almost a decade in bull market territory, and dimming profit outlooks are a big part of that. Investors will be watching closely for signs of a quicker-than-expected earnings slowdown — a development that could make them reconsider owning equities at current levels. Those cautious investors will be happy to know that Goldman Sachs has formulated an options-trading strategy designed to take advantage of the large price swings that normally accompany first-quarter earnings season. How big are we talking? Goldman says earnings reports are moving stocks 4.4 times more than in average trading, which is well above the trailing 20-year mean. Not to mention the firm finds that more than 25% of annual corporate preannouncements — which are reliably market-moving events — come in January. Goldman Sachs So what’s a trader to do? Goldman’s strategy is as follows: An investor buys the closest one-month straddle on a stock five days ahead of earnings and then closes it one day after the report. (Note: A straddle is an approach that involves the simultaneous purchase of a put and a call of the same underlying stock, striking price, and expiration date.) But there’s a catch. To qualify for the big returns Goldman has seen, the straddle must cost less than the earnings move being implied by the market. That’s a big qualification that narrows down the universe considerably. On an average basis, the trade has returned a whopping 24% since 1996, according to Goldman. That’s a fantastic profit for just six days of exposure. The last remaining piece revolves around which stocks qualify for the trade. To that end, Goldman provides the list of 20 companies below, each of which fits perfectly into the strategy. Goldman Sachs Global Investment Research With all of this established, it’s important to note that the trade’s success isn’t guaranteed — at least to the outsize degree it’s already enjoyed. The market’s overall tone and direction are key variables in the equation. But you could certainly do a whole lot worse than implementing a proven strategy that comes so highly recommended by one of Wall Street’s best firms.
This is a subscriber-only story. To read the full article, simply click here to claim your deal and get access to all exclusive Business Insider PRIME content.
Get the latest Goldman Sachs stock price here.
I hereby give credit where credit is due to the author
more recommended stories
Facebook is as bad for your health as smoking, say tech experts, who think the cure is breaking up the social network
Facebook CEO Mark Zuckerberg. Reuters Facebook.
Legendary billionaire Ray Dalio told a crowd at Davos that the next economic meltdown scares him more than anything — here’s what he said, and why he’s so worried
Ray Dalio, the founder and co-chief.
What is Rudy Giuliani thinking?
It’s been a roller-coaster week for.
One year ago, the founder of the world’s biggest hedge fund predicted that people holding cash would ‘feel pretty stupid.’ He was wrong.
Heidi Gutman / CNBC Bridgewater Associates.
Stocks are getting whacked as global-growth fears mount
Mario Tama/Getty Images Stocks were hit.
The government shutdown may force Trump to make a nightmare choice between his border wall and the economy
As the government shutdown enters its.
Davos 2019 Day One: Huawei chairman said trade war is slowing sales, Microsoft CEO talked tech’s impact on humanity
REUTERS/Arnd Wiegmann The world’s elite converge.
10 things you need to know before the opening bell (SPY, SPX, QQQ, DIA)
S & P 500 -17.75 2,652.96.
SHUTDOWN DAY 32: The government shutdown could end up costing more than the $5.7 billion Trump wants for the wall
The record partial government shutdown could.
Starbucks is teaming up with Uber to start delivering coffee in 6 of the biggest US cities
A map of the US cities.