All earnings seasons are an ideal time to make money trading stocks. Investors are given a huge load of tradeable information, and the resulting price swings create major opportunities.
But there’s something particularly special about the third quarter that conjures up stock movements not seen throughout the rest of the year, says Goldman Sachs.
This is likely because it’s the period in which companies provide the most forward guidance. It’s also possible that the seasonally heavy demand for tech and consumer discretionary — two massively influential industries — have investors playing particularly close attention, the firm says.
So with all that opportunity for profit, what’s the best way to ensure you cash in?
It’s simple: buy straddles.
Straddles involve the purchase of both call and put contracts. If the stock price moves up dramatically, a trader can use the call option to buy shares at a big discount, while if the price drops far enough, the put option will instead turn a profit.
There’s just one catch, however. The straddle should cost less than the implied earnings-related stock move, Katherine Fogertey and the Goldman derivatives team wrote in a client note on Wednesday.
To reach this conclusion, they sifted through more than 25,000 corporate earnings reports since 1996. The team found that investors that bought straddles five days before earnings, then closed those positions the day after the report, would have made an average profit of 24%, with a success rate of 56%.
“This is significantly greater than the returns from buying options on all stocks broadly regardless of this signal,” said Fogertey.
While Goldman’s recommendation is just one way to trade earnings season, it’s hard to argue with those results. So before you go digging through those financial statements for the hidden nugget that will unlock huge future gains, consider making things a little easier on yourself by buying straddles.
Earnings season kicks off on Thursday, as Citigroup and JPMorgan report results, followed by Bank of America and Wells Fargo on Friday.
Get the latest Goldman Sachs stock price here.