As regular readers know, Goldman’s Katherine Fogertey and John Marshall are always on the lookout for potentially lucrative options opportunities, especially in the context of the current (and remarkably persistent) low vol. regime.
If you’ve missed our coverage of the duo’s “Options Watch” pieces you should check these posts out (or not):
- “Not All Sunshine And Rainbows”: Goldman “Finds Fear” In These 15 Stocks
- “Mark It Zero!” Goldman’s Top 10 Options Trades To Capitalize On Low Vol
- Goldman: It’s Time To Replace Your Stocks
- Goldman: Buy Puts On These Shitty Stocks For A Pullback (Spoiler: Tesla’s One Of Them)
The last time we checked in with Katherine and John, they were busy explaining why investors should “use the return of complacency to buy ETF options for macro catalysts.” Or, in other words, vol. “mean reverted” after the May 17 selloff, which means options were cheap again and given the rather daunting calendar (at that point, we were still staring down the UK elections), buying June straddles was the way to go.
Well, fast forward three weeks and Katherine and John are back and they want you to know that “the month of July has been a popular month for companies to preannounce over the past six years.”
What does that mean for you? Well, they’re glad you asked, because if you ask them (and you just did, vicariously, through me), they “believe option prices are underestimating this risk and are instead focused on expected earnings reports.”
The month of July has been the second most popular month for companies to preannounce over the past six years, but we believe the options market is missing preannouncement potential for many stocks. We examine the vol surface of stocks with weekly options and show that the options market is pricing in earnings volatility in July week 4 and August, but is not pricing in elevated volatility for July week 2 – the peak of preannouncement activity historically.
We believe the options market often overlooks these historically stock moving catalysts for shares, and we find some patterns in the data which show that sectors have seen higher preannouncement activity at different points in the year.
By sector, preannouncement activity in the Technology (29%) and Health Care (16%) sectors has been the heaviest in the last two weeks of June and the month of July, followed by Industrials (11%). Not all preannouncements are negative events for stocks, despite the potential investor concern over them; in our 2014 report, we found that nearly half of all preannouncements were positive catalysts for shares. We define a preannouncement as any formal commentary by management regarding guidance and/or financials made intra-quarter.
1. Buy GIS straddles for Jun-28 earnings and Jul-12 analyst day Nielsen data suggests GIS has underperformed all major categories in the quarter. However, option investors are not pricing in the potential for higher than normal volatility at the upcoming earnings and analyst day.
2. Buy NKE straddles for Jun-29 earnings We recommend positioning with straddles given the potential for shares to realize high volatility on an expected controversial quarter.
3. IBM options miss potential for Jul-18 earnings volatility IBM July straddles cost less than the historical 8-quarter earnings move despite capturing the earnings and a month of additional trading days.
4. Buy CPB straddles for Jul-19 analyst day CPB analyst days have been 2X as stock moving as a normal trading day.
5. Buy MSFT straddles for Jul-20 earnings