Goldman's winning options strategy for the upcoming earnings season

Goldman Sachs' derivatives research team recommends that investors utilize options straddles ahead of Q2 earnings reports, specifically targeting stocks where implied options moves are inexpensive relative to their historical earnings-day volatility. This strategy aims to profit from significant post-earnings price fluctuations, regardless of direction, and can serve as a portfolio overlay to hedge or amplify exposure. Key stocks highlighted by Goldman for this approach include Netflix, Fastenal, 3M, RTX, and Honeywell, each presenting distinct profiles around their upcoming earnings announcements.

Analysis

Goldman Sachs' derivatives research team is recommending a speculative, event-driven options strategy ahead of the Q2 earnings season. The core thesis is to purchase straddles on select equities where the options market's implied volatility appears low relative to the stocks' historical post-earnings price movements. This strategy, which involves buying both a call and a put option, is designed to profit from significant price swings, irrespective of the direction. The identified opportunities include high-momentum stocks such as Netflix (NFLX), which is up 40% year-to-date and has a history of large earnings reactions, and industrials like Fastenal (FAST) and 3M (MMM), both up approximately 21% YTD and trading at multi-year or all-time highs. Defense contractor RTX is also highlighted, with a 26% year-to-date gain fueled by increased military spending. Conversely, the strategy also targets Honeywell (HON), a relative underperformer with a 5% gain this year, positioning for a potential catch-up rally or a significant move on its July 24 report. The approach is presented as a portfolio overlay that can either hedge risk or amplify upside exposure during a correlated market move.

Key Decisions for Investors

• Consider implementing long straddle options strategies on the identified stocks (NFLX, FAST, MMM, RTX, HON) ahead of their July earnings dates to capitalize on the reported discrepancy between low implied volatility and historical earnings-day price action.
• Differentiate between the high-momentum targets like NFLX and RTX, where the trade bets on continued volatility, and the laggard Honeywell, where the position is structured for a potential catalyst-driven catch-up move.
• Investors should recognize this as a speculative, premium-based strategy where profitability depends on the stock's price moving beyond the breakeven points established by the cost of the options.
• Evaluate using this strategy not just for isolated trades but as a potential portfolio overlay to either hedge existing single-stock positions against adverse earnings surprises or to amplify returns.