Goldman: Market is underpricing earnings moves

The US bourse is set to open higher as European leaders get ready to meet.

The US bourse is set to open higher as European leaders get ready to meet.

Published Oct 1, 2014

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New York - US stock market volatility has been higher of late - the CBOE Volatility index spiked 36 percent in September - but the options market is “nearly missing the potential” for stocks to move following their earnings, Goldman Sachs wrote on Wednesday.

The firm said the options market was implying an earnings move of 3.3 percent for the earliest companies to report, “the lowest level over the past 10 years, and 1 percent lower than the current realised environment suggests.”

The firm recommended buying October straddles in Netflix, Yum Brands and Capital One Financial, which offered straddles that cost less than the historical earnings move.

A straddle strategy involves an investor buying both a bullish call option and a bearish put option at the same strike price.

It is a bet that a stock will move by a certain amount, rather than in a specific direction.

In late September, derivative strategists at Goldman recommended buying near-term straddles on IBM ahead of the stock's earnings report. - Reuters

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