Goldman says it's a great time for the 'stock replacement' options strategy – how it works

Goldman Sachs suggests investors consider replacing outperforming stocks with call options, citing the S&P 500's near record high and recent gains. According to Goldman, this strategy allows investors to maintain upside exposure while limiting downside risk to the premium paid. Specific outperformers highlighted include Meta Platforms, Dollar Tree, and Uber Technologies, though Dollar Tree faces potential headwinds from tariffs impacting earnings.

Analysis

Goldman Sachs advocates for investors to consider purchasing call options as a substitute for outperforming stocks, leveraging the S&P 500's recent advance, which saw the index up approximately 2.8% year-to-date and within 1.7% of its February record high as of Thursday's close. The market's momentum, evidenced by a nearly 3% gain in the past month and over 9% in the last three months, underpins this strategy, although recent geopolitical events, such as Israel's strike on Iran, momentarily paused its trajectory. According to John Marshall, Goldman's head of derivatives research, this approach allows investors to retain upside exposure on strongly performing equities while limiting downside risk to the premium paid for the options. Specific buy-rated names highlighted for this 'stock replacement' strategy include Meta Platforms and CrowdStrike, both of which have outperformed the S&P 500 and their respective sector indexes by over 10%. Meta Platforms has demonstrated significant strength, rising over 18% in 2025 and over 17% in the past three months, further bolstered by a reported $14 billion investment into Scale AI. Uber Technologies is another notable outperformer, with its stock increasing by more than 17% this quarter, surpassing the S&P 500 by 41%. Conversely, Dollar Tree, despite a surge of over 45% in the past three months, faces considerable headwinds; the company projects a potential year-over-year fall in adjusted earnings per share of up to 50% for the current quarter, citing President Donald Trump's tariffs as a primary concern.

Key Decisions for Investors

• Investors holding significantly appreciated stocks, particularly outperformers like Meta Platforms and Uber Technologies, might consider replacing a portion of their equity holdings with long call options to maintain upside exposure while defining downside risk, as suggested by Goldman Sachs.
• Careful due diligence is warranted for companies like Dollar Tree; despite its substantial recent stock gains, the pronounced negative earnings guidance due to tariff impacts suggests a higher risk profile that may not be suitable for a simple stock replacement strategy without further analysis of future profitability.
• Monitor broader market conditions, including geopolitical developments and trade policy shifts, as the efficacy of this options strategy is contingent on continued market stability or appreciation; increased volatility could significantly alter the risk-reward dynamics of options positions.