Earnings season is better than feared and the stock market has been relatively calm, according to Goldman Sachs. In a note to clients on Wednesday, the stock’s implied volatility over earnings has declined in recent weeks, and the simple strategy of buying call options has become a winner. Buying the call ahead of the return on average U.S. equities provided a 29% increase in return to premium,” says the quarterly note. A call option is a contract that gives the holder the right to buy shares at a set strike price. An investor may purchase a contract at a strike price slightly above the current market price of the stock and make a profit if it rises above that level. When implied volatility is low, the premiums paid on option contracts are relatively small, giving the trade more upside. The risk of investing in a call option is limited to the premium price of the contract. Goldman said two of his upcoming earnings reports that could be good candidates for this strategy are breakfast cereal maker Post Holdings and agribusiness company Bunge. The Post will report earnings after the bell on February 2nd, and Bunge will release them on the morning of February 8th. Both stocks have underperformed his S&P 500, with bullish outlook from Goldman analysts. Of the Post, analyst Jason English believes that “the company’s all-in-fundamental looks to be on its firmest footing in years, despite its lowest valuation.” Goldman said another way to take advantage of low implied volatility is to go long straddles. A straddle is a transaction in which an investor buys a call his option and a put his option on the underlying asset. This means that you can profit from trading if the stock rises or falls. “There is value in selectively straddling stocks where option prices appear lower than the last eight quarters of the earnings date,” the note said. The other three companies with low implied volatility are Avis Budget, Snap and Bill.com, according to Goldman. Snap will release his latest results on January 31st, and his two other companies he will report on in February.
