Goldman Sachs Identifies Best Option Plays This Earnings Season

July 11, 2012 11:20 AM EDT
Into earnings, most traders want to know, "What are my options?"


Good thing Goldman Sachs has pieced together a report giving you some guidance on whether or not to go long or short on call or put options. Or maybe a strangle for the astraddle.

According to Goldman, current options markets imply +/- 5.7 percent move for the average stock on its earnings day for the second quarter. This is below the trailing seven-year average of +/- 6.7 percent, but above the average of +/- 4.3 percent observed over the last eight quarters.

Unusually high volatility is expected in Healthcare and Utility stocks, with ratios of 1.6 versus historical moves. Financials should be at a 1.5 ratio.

So, Goldman thinks call buying will be big this quarter, given its propensity to outperform in prior years. The anomaly happened last quarter, when call buyers saw a 15 percent drop on premium while put buyers saw a 9 percent gain. Prior to that, over the last 15 years, call options have returned positive results overall.

For strangle strategies -- buying a call and put which expire in the same month, but have different strike prices -- the results are mixed. Strangle buyers generally expect a rapid rise or fall in shares, paying a but more premium to capture that movement.

Goldman gives the following suggestions for upside to EPS estimates:

  • Regions Financial (NYSE: RF) - Sees 21 percent upside over next 12 months, with Regions' concentrated exposure in teh Southeastern US as a solid investment positive. Net margins should move 10 basis points by year end 2013, expense leverage to result in a 300 basis point improvement in Regions' 2013 efficiency ratio, and provision to decline 64 percent in 2012 versus 2011.

  • Wells Fargo - sees upside from mortgage banking business, with low rates continuing to benefit refis and new issuances.
  • McKesson (NYSE: MCK) - sees high-mid-teens growth continuing. Goldman says McKesson "continues to look to generics as the key driver in reaching the company‚Äôs goal of 200-250 bp margins in its Distribution business, while making great strides in building out other areas including Canada and Specialty. On the HCIT side, he believes investor focus remains on clinical, despite management stressing the importance of the Connectivity and Payer offerings."

  • Quest Diagnostics (NYSE: DGX) - likes defensive sales mix of no European exposure and stable volumes relative to mounting headwinds. Though top-line growth might be muted, Goldman sees more cost-cutting available with the new CEO.
  • Chiptole Mexican Grill (NYSE: CMG) - sees negative sentiment that comps could fall below 10 percent a potential setup for upside, with shares dropping 6 percent recently. Goldman sees comps up 10 percent to 11 percent, with EPS also beating.

  • Ross Stores (Nasdaq: ROST) - Goldman thinks the market is under appreciating how the macro backdrop is pushing consumers to seek out value alternatives like Ross Stores.
  • Marathon Pertoleum (NYSE: MRO) - Goldman commented that it "expects MidCon (Mid-Continent focused refiners) crude oil spreads to remain wider than current buy-side expectations (i.e., above $4/bbl for Brent-WTI), driving 9% upside to consensus earnings this quarter, and 21% upside over the next three quarters...[the firm also] expects updated details on the previously announced plans to consider creating an MLP for a portion of its mid-stream assets to bode well for shares."

  • Suncor Energy (NYSE: SU) - sees positives as above-average liquids volume, returns on capital and free cash, strong balance sheet, and shareholder returns.

  • Southwestern Energy (NYSE; SWN) - says market is overly concerned that Marcellus Shale returns will decline, with additional room for 'imports' in the Northeast to be displaced. Also, Fayetteville Shale asset costs should be lower than peers.
  • Boeing (NYSE: BA) - bullish on orders at Farnborough Air Show as well as overall order prospects for the remainder of 2012, particularly for 777s, 747-8s, and 737 MAXs.

  • Caterpillar (NYSE: CAT) - likes exposure to end markets, upside to margins, and impressive supply tailwinds. Goldman also thinks North America is in the starting part of a cyclical recovery.
  • Weyerhaeuser (NYSE: WY) - thinks the Street isn't fully factoring in wood product price increases.
  • (NYSE: CRM) - continues to see as a core holding in the software space, with the Company benefiting from the migration to SaaS solutions. Open sales positions have been on an upward trend as well.

  • EMC Corp. (NYSE: EMC) - sees a broad new product cycle continuing momentum beyond the summer. Goldman notes that EMC stock performs well during periods of economic duress.
Downside risks

  • Bank of NY Mellon (NYSE: BK)
  • Boston Scientific (NYSE: BSX)
  • Illinois Tool Works (NYSE: ITW)

  • 3M Co. (NYSE: MMM)

  • PACCAR (Nasdaq: PCAR)
  • Safeway (NYSE: SWY)
  • Autodesk (Nasdaq: ADSK)

  • Dell (Nasdaq: DELL)

  • DISH Network (Nasdaq: DISH)

  • Intel (Nasdaq: INTC)

  • MetroPCS (NYSE: PCS)

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