Trading Strategy
According to Goldman Sachs, the first three weeks of April are a popular time for companies to preannounce their results, and given the number of issues investors are looking for clarity on, including the impact from the recently passed tax bill, the prospect of protectionist trade policies and whether management teams are seeing any sign of inflation or impact from higher interest rates, such announcements could prove pivotal for traders. The technology sector, which has recently been in focus due to the massive swings it has seen, could be particularly susceptible to this kind of volatility. According to Goldman, fully 33% of April preannouncements are done by companies in that sector. The consumer-discretionary sector and healthcare followed it in a sector breakdown (17% of preannouncements come from discretionary stocks, while 14% are in health care).
Goldman Sachs recommended buying straddles on these names, referring to an options strategy where an investor buys a bullish call option and a bearish put option at the same strike price. This is a bet that a security will move by a certain amount, as opposed to in a specific direction, making it essentially a bet on volatility. “If investors see a fundamental basis for elevated preannouncement potential, often options provide a very attractive way to express this view by positioning for earnings volatility further ahead of the earnings event than normal,” it wrote. “If the company does provide an update ahead of results, they capture two earnings events for the price of one. But, if the update does not occur, often they just face losing just the time decay of the options, which could be partially offset if implied volatility rises ahead of earnings.”
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