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Goldman Sachs recommends making 25 options trades as the Q2 earnings season kicks off. AP This story is available exclusively to Insider subscribers. Become an Insider and start reading now. Volatility in markets has been elevated this year, and that will only continue in Q2. Goldman Sachs believes that stocks could get whacked if they can’t top a low bar. The firm laid out 25 options trades that will help investors benefit from volatility. Stock volatility surged in the first half of 2022, and Goldman Sachs expects the wild swings to continue in the Q2 earnings season and through the end of the year as the economy loses steam.
“We expect an unusually volatile earnings season for single stocks,” wrote John Marshall, the head of derivatives research at Goldman Sachs, in a July 12 note.
“Single stock volatility on earnings events increased again last quarter to near a decade high. We expect earnings day moves to remain elevated even as non-earnings day moves decline with macro volatility,” Marshall said.
Equities have already come under heavy pressure this year as higher interest rates cause stock valuations to fall, Marshall noted. Investors appear to be less willing to pay a premium for future growth and give firms the benefit of the doubt, which means that earnings reports will be under even more scrutiny than usual.
“We expect earnings beats/misses to be increasingly relevant this quarter as growth slows,” Marshall wrote.
Pressure makes diamondsIt’s especially important for earnings results to impress this quarter, and Goldman Sachs appears to be optimistic that they will — for the most part, anyway.
“Our analysts’ weighted average price target implies +20% upside over the next 12 months to S&P 500 stocks in our coverage (vs 10-year average of +9% upside implied),” Marshall wrote. “Based solely on this metric’s relationship with quarterly returns, we would expect stocks to be up 6.0% this quarter.”
Options pricing also implies moves of about 6%, which Marshall noted was the third highest mark in the past 12 years heading into an earnings season. While that stat means that misses might cause more pain than usual, it also suggests that stocks could be a coiled spring.
“High fear priced for earnings sets stocks up for relief rallies on earnings-day,” Marshall wrote.
25 options trades to makeIn a highly volatile earnings season, there are bound to be both sudden relief rallies and huge letdowns. Betting on the wrong stock — or not betting on the right stock — can be costly.
Though it’s impossible to know exactly which names will be winners or losers, investors can consider using options contracts to define their risk upfront and benefit from large stock swings.
“We continue to see option buying strategies as attractive ahead of earnings events,” Marshall wrote.
Marshall and his team searched for the “most out-of-consensus” opportunities out of over 1,300 names, meaning Goldman Sachs analysts are either much more bullish or bearish on those companies’ forward earnings outlook than the rest of Wall Street. In the end, Goldman Sachs’ derivatives research team laid out 25 options trades that allow traders to take advantage of volatility.
Seventeen of these trades are for stocks that the firm is bullish on, so the recommendation is to buy a call option to benefit as the equity rises above a certain level, which is called the strike price. If that happens within the specified timeframe, then trade is profitable.
Eight trades are for stocks that Goldman Sachs is less optimistic about, so the recommendation is to buy a put option to profit as shares of a company fall below the designated strike price.
Below are the 25 options trades that Goldman Sachs believes will be profitable in a volatile Q2 earnings season. Along with each is its ticker, sector, Goldman Sachs earnings estimate versus the consensus, implied stock move, a thesis from an analyst, and the options trade idea. The first 17 recommendations are for buying a call, and the last eight are for buying a put.
1. Mattel
Markets Insider Ticker: MAT
Sector: Consumer Discretionary
GS earnings estimate vs consensus: >20%
Implied stock move: 5.9%
Thesis: “MAT’s revenue growth of high single digits in 2022/23 should be supported by a strong pipeline of demand drivers including content and new product launches.”
Options trade recommendation: Buy an August call at a strike price of $25 at a cost of 2.7%
2. Pioneer Natural
Markets Insider Ticker: PXD
Sector: Energy
GS earnings estimate vs consensus: 3%
Implied stock move: 10.8%
Thesis: “PXD is favorably positioned to generate attractive FCF given its differentiated undeveloped inventory (15+ years) in the core of the Permian.”
Options trade recommendation: Buy an August call at a strike price of $220 at a cost of 5.9%
3. Discover Financial
Markets Insider Ticker: DFS
Sector: Financials
GS earnings estimate vs consensus: 4%
Implied stock move: 6.3%
Thesis: Our analyst “is most constructive across his coverage on DFS driven by his expectations for a top-line beat on higher Net Interest Income (NII) given tailwinds from higher rates and stronger loan balances while fees could also exceed expectations given stronger purchase volume trends.”
Options trade recommendation: Buy an August call at a strike price of $100 at a cost of 5.7%
4. Interactive Brokers
Markets Insider Ticker: IBKR
Sector: Financials
GS earnings estimate vs consensus: 8%
Implied stock move: 3.3%
Thesis: Our analyst “favors IBKR on earnings upside potential (primarily interest rates), strong organic growth (sustaining above 20% even with elevated market volatility ) and compelling valuation.”
Options trade recommendation: Buy an August call at a strike price of $55 at a cost of 4.6%
5. Northern Trust
Markets Insider Ticker: NTRS
Sector: Financials
GS earnings estimate vs consensus: 8%
Implied stock move: 5.4%
Thesis: Optimism is “driven by organic growth momentum in both Corporate & Institutional Services (C&IS), Wealth management in addition to net interest income (NII) tailwinds. Within C&IS, NTRS management commentary indicates capital markets solutions (FX and outsourced trading) as a particularly strong area for organic growth.”
Options trade recommendation: Buy an August call at a strike price of $100 at a cost of 2.9%
6. Regions Financial
Markets Insider Ticker: RF
Sector: Financials
GS earnings estimate vs consensus: 2%
Implied stock move: 6.2%
Thesis: Our analyst “recommends owning banks that offer a combination of offensive (NII upside) and defensive (rate hedging) flavors, as most banks have credit sensitivity at this point given the uncertainty. In this backdrop, he notes that RF has a relatively favorable positioning.”
Options trade recommendation: Buy an August call at a strike price of $20 at a cost of 3.1%
7. Raymond James
Markets Insider Ticker: RJF
Sector: Financials
GS earnings estimate vs consensus: 5%
Implied stock move: 4.5%
Thesis: Our analyst “highlights favorable rates are a tailwind offset by a lower market. He uses 2023 cash revenue estimates to size potential upside from rates and forecasts strong outlook for RJF among peers.”
Options trade recommendation: Buy an August call at a strike price of $90 at a cost of 5.6%
8. Alignment Health
Markets Insider Ticker: ALHC
Sector: Financials
GS earnings estimate vs consensus: 12%
Implied stock move: 3.6%
Thesis: Our analyst “thinks targeted investments can help re-accelerate member growth in 2023 and disciplined pricing and cost management give it the clearest path to profitability amid SMID MCOs. He believes the proposed expansion to new counties will increase exposure to Medicare-eligible lives by 1.1mn (& 526k MA lives), pending regulatory approval.”
Options trade recommendation: Buy an August call at a strike price of $15 at a cost of 7.3%
9. Signify Health
Markets Insider Ticker: SGFY
Sector: Healthcare
GS earnings estimate vs consensus: 10%
Implied stock move: 9.2%
Thesis: “Our analyst views the company’s decision to move away from the negative EBITDA ECS segment as a positive. The company also said they would see record in-home evaluations (IHEs) this quarter; therefore, she believes the HCS [home and community services ] division could post strong 2Q22 numbers.”
Options trade recommendation: Buy an August call at a strike price of $17.50 at a cost of 4.6%
10. Bunge
Markets Insider Ticker: BG
Sector: Industrials
GS earnings estimate vs consensus: 7%
Implied stock move: 8.4%
Thesis: “BG is best positioned to capitalize on the current tight soft commodity backdrop as the world’s largest processor of vegetable oil and given its relative valuation to peers.”
Options trade recommendation: Buy an August call at a strike price of $90 at a cost of 3.9%
11. CF Industries
Markets Insider Ticker: CF
Sector: Materials
GS earnings estimate vs consensus: 16%
Implied stock move: 7%
Thesis: Our analyst “is bullish on the stock as his Q5-Q8 EBITDA-based target (e.g. 2Q23-1Q24) reflects a moderation of pricing from current levels that nonetheless is well above 2016-21 averages that could still prove conservative, in his view.”
Options trade recommendation: Buy an August call at a strike price of $90 at a cost of 5.3%
12. Monster Beverage
Markets Insider Ticker: MNST
Sector: Consumer Staples
GS earnings estimate vs consensus: 7%
Implied stock move: 4.7%
Thesis: “MNST is one of our analyst’s top picks given strong underlying consumer demand, MNST’s strong execution and attractive valuation. Importantly, the pricing environment in energy drinks remains healthy as MNST’s previously enacted a >3% price increase in the US and EMEA saw no real pushback from consumers.”
Options trade recommendation: Buy an August call at a strike price of $100 at a cost of 3.2%
13. AppLovin
Markets Insider Ticker: APP
Sector: Technology, Media, & Telecom
GS earnings estimate vs consensus: 6%
Implied stock move: 13.6%
Thesis: “AppLovin is a $13bn market cap company with ad tech and business software platform that delivers marketing and monetization software solutions to all mobile developers. Going forward, [analyst] Eric [Sheridan] believes management execution on transitioning the platform to a software business that can be applied to multiple markets (e.g., connectedTV) will be a key driver in stock performance of the medium-term.”
Options trade recommendation: Buy an August call at a strike price of $35 at a cost of 12.6%
14. CrowdStrike
Markets Insider Ticker: CRWD
Sector: Technology, Media, & Telecom
GS earnings estimate vs consensus: 3%
Implied stock move: 7.3%
Thesis: “CrowdStrike is a $44bn market cap cloud native endpoint cybersecurity provider. [Analyst] Brian [Essex] views CRWD as well positioned in the sweet spot of demand ahead of accelerating deterioration of the threat environment, with Endpoint expected to remain a top CIO priority within Security.”
Options trade recommendation: Buy an September call at a strike price of $190 at a cost of 10%
15. Datadog
Markets Insider Ticker: DDOG
Sector: Technology, Media, & Telecom
GS earnings estimate vs consensus: 13%
Implied stock move: 16.1%
Thesis: “With a long-term secular shift to the public cloud, spending on infrastructure software and observability remains robust. [Analyst] Kash [Rangan] believes Datadog is uniquely positioned as a cloud-native infrastructure platform that provides end-to-end diagnostics, performance management and security.”
Options trade recommendation: Buy an August call at a strike price of $105 at a cost of 11.1%
16. IAC/Interactivecorp
Markets Insider Ticker: IAC
Sector: Technology, Media, & Telecom
GS earnings estimate vs consensus: 17%
Implied stock move: 10.4%
Thesis: Our analyst “sees IAC as a collection of compelling consumer internet businesses trading at a discount to NAV. He is optimistic on Dotdash Meredith integration with focus on 2H22 improvements.”
Options trade recommendation: Buy an August call at a strike price of $80 at a cost of 4.9%
17. Atlassian
Markets Insider Ticker: TEAM
Sector: Technology, Media, & Telecom
GS earnings estimate vs consensus: 15%
Implied stock move: 10%
Thesis: Our analyst “sees multiple drivers aiding the accelerated growth: 1) the end of life of its on-premise Server product at the end of CY23/FY24 2) substantial discounts for large customers migrating from Server to Cloud (that can be ~40% in first year) 3) incremental revenue recognition from large customers phasing out of discounted offers and 4) annual double-digit price increases in Data Center plans that can propel conversion to Cloud.”
Options trade recommendation: Buy an August call at a strike price of $220 at a cost of 7.9%
18. Mister Car Wash
Markets Insider Ticker: MCW
Sector: Consumer Discretionary
GS earnings estimate vs consensus: -8%
Implied stock move: N/A
Thesis: Our analyst “recently downgraded MCW to Sell (from Neutral) owing to the largely discretionary nature of its services given challenging macro, despite the broader affordability of its base wash ($10 or less). Management noted softening demand on the retail side of the business during early 2Q (as of mid-May).”
Options trade recommendation: Buy an August put at a strike price of $10 at a cost of 4.5%
19. Ralph Lauren
Markets Insider Ticker: RL
Sector: Consumer Discretionary
GS earnings estimate vs consensus: -5%
Implied stock move: 6.7%
Thesis: Our analyst’s “Sell thesis is predicated on fading brand momentum indicators and limited benefit from a shift to Direct-to-consumer (DTC) vs peers. She notes WSGN survey data and Google Trends data point to fading consumer interest in RL.”
Options trade recommendation: Buy an August put at a strike price of $90 at a cost of 5.6%
20. VF Corp.
Markets Insider Ticker: VFC
Sector: Consumer Discretionary
GS earnings estimate vs consensus: -15%
Implied stock move: 7.5%
Thesis: In our analyst’s “view, brand momentum indicators remain weak, and she expects ongoing market share losses for the high-margin Vans and Supreme brands. She remains skeptical on the path to outperformance for the stock, as she believes underlying soft brand momentum at Vans remains a show-me story and will continue to weigh on future estimate revisions.”
Options trade recommendation: Buy an August put at a strike price of $42.50 at a cost of 3.7%
21. Coinbase Global
Markets Insider Ticker: COIN
Sector: Financials
GS earnings estimate vs consensus: -6%
Implied stock move: 10.7%
Thesis: Our analyst “recently downgraded COIN shares to Sell (from Neutral) as he believes current crypto asset levels and trading volumes imply degradation in COIN’s revenue base. Although COIN announced significant restructuring, he believes further cuts are needed and that they will need to make substantial reductions in cost base in order to stem the resulting cash burn as retail trading activity dries up.”
Options trade recommendation: Buy an August put at a strike price of $50 at a cost of 13.1%
22. A.O. Smith Corp.
Markets Insider Ticker: AOS
Sector: Industrials
GS earnings estimate vs consensus: -6%
Implied stock move: 6.3%
Thesis: Our analyst “maintains a cautious outlook on the industry and stock given 1) new regulations for commercial products, leading mgmt to revise its expectations for full year volumes from flat to incorporate the potential for a modest decline, 2) lockdowns in China causing a steep deceleration in demand, and 3) above average channel inventories in North America residential water heaters, suggesting some pull-forward.”
Options trade recommendation: Buy an August put at a strike price of $55 at a cost of 3.6%
23. Woodward
Markets Insider Ticker: WWD
Sector: Industrials
GS earnings estimate vs consensus: -8%
Implied stock move: 8.8%
Thesis: Our analyst “remains bearish on WWD as its operating results have been volatile, consensus estimates continue to move lower, headwinds remain in the near-to-medium term, mix is unfavorable; yet valuation is at the higher-end of his aerospace supply chain coverage.”
Options trade recommendation: Buy an August put at a strike price of $90 at a cost of 5.3%
24. Murphy USA
Markets Insider Ticker: MUSA
Sector: Consumer Staples
GS earnings estimate vs consensus: