Stock market options strategy for earnings season: 20 recs from Goldman - Business Insider

Goldman Sachs equity and derivatives strategist Vishal Vivek says investors might be underestimating the volatility some stocks might experience because of a combination of earnings and major news. He's compiled a list of 20 stocks where the options market appears to be expecting only a small move when a larger one is likely. That could create an inexpensive opportunity for profits.He also recommends taking advantage of inexpensive options and potential volatility in the healthcare, industrial, and utilities sectors.Visit Business Insider's homepage for more stories.

Goldman Sachs is worried something important may have slipped your mind.Equity and derivatives strategist Vishal Vivek says he thinks investors are focusing more on national and global issues than ones affecting individual companies, and he's crafted an options strategy to fix it.“We believe options investors are focused on macro uncertainty rather than earnings season risks,” he wrote in a note to clients. “Over the next five weeks, in addition to the nearly 300 S&P 500 companies reporting earnings, multiple macro catalysts, including an FOMC meeting, ISM release, Payrolls, the State of the Union and Democratic primaries, are likely to support elevated levels of volatility in equity markets.”Vivek says the combination of earnings and macro news creates an opportunity. He proposes using straddles — or strategies that involve the simultaneous purchase of a put and a call of the same underlying stock, striking price, and expiration date — as a way to take advantage of price swings in either direction.He explains that for a small number of stocks, that strategy is unusually appealing because the market isn't appreciating the potential volatility, which means the straddles are cheap.

“We screen for S&P 500 stocks where the cost of straddle capturing earnings is below historical earnings-day moves alone, despite the potential for additional volatility driven by macro catalysts,” he said.To find the trades that offer the most bang for a potential investors' buck, Vivek looked at companies and averaged the moves their stock made after the company's last eight earnings reports. Next, he reviewed options market data to find the move in each stock implied by current options prices.For some companies, the average post-earnings move is larger than the reaction the options market expects from the upcoming quarterly report. Vivek reasons that when that gap gets larger, the opportunity presented by taking a straddle position gets bigger.Here are those 20 stocks, ranked from lowest to highest based on the size of the price gap.