How to Trade Earnings Season Like a Pro
Earnings season is fast approaching, and Goldman Sachs’ strategists are advising investors to consider options strategies to capitalize on expected market moves. With implied volatility currently near historic lows, the bank believes traders may be underestimating the potential price swings that follow quarterly earnings reports.
According to Goldman, the average S&P 500 stock is expected to move 4.5% up or down after earnings, based on options pricing. This level is close to the lowest in the past 20 years. For context, two quarters ago, the same measure reached 5.4%, marking the highest earnings-related volatility since 2009.
Goldman argues that, despite subdued market expectations, the fundamental drivers of volatility remain intact. Investors who strategically use options can potentially profit from these post-earnings swings, whether stocks move up or down.
Why Options Are Key in Earnings Season
Earnings reports are often catalysts for significant price movements. Companies that beat expectations can rally sharply, while disappointing results can trigger declines. Options provide investors with flexibility and leverage, allowing them to participate in these moves without committing to full stock positions.
For instance:
- Calls allow investors to profit from upside moves with limited risk.
- Puts allow investors to benefit from downside moves or hedge existing holdings.
Goldman specifically recommends buying out-of-the-money options in stocks expected to experience strong volatility. This approach reduces upfront costs while positioning investors for significant post-earnings swings.
Sectors with the Most Potential
Goldman analysts highlighted specific sectors likely to see notable post-earnings volatility:
- Utilities: Surprisingly volatile in recent quarters, despite typically being defensive.
- Healthcare: Driven by regulatory news, earnings surprises, and M&A activity.
- Materials and Industrials: Sensitive to macroeconomic trends, commodity prices, and supply chain developments.
Conversely, technology stocks have seen volatility decline over the past year, although individual companies may still experience sharp post-earnings moves.
Market Fundamentals Suggest More Upside
Goldman expects earnings this season to show more upside than downside. Their analysts raised S&P 500 earnings estimates by 5% and increased the index’s price target by 8% over the last three months, while the index itself rose just 3%. This divergence suggests fundamental improvements have outpaced stock price gains, creating opportunities for earnings-driven trades.
Additionally, individual investors have been aggressive buyers of both single stocks and ETFs over the same period, which Goldman views as a positive signal for forward equity performance.
Top Stocks for Earnings-Driven Options Trades
Goldman identified 25 “out-of-consensus” stocks where they expect significant earnings surprises or sector-specific catalysts. Among the top names for potential upside:
- Meta Platforms (META): Strong ad revenue and user engagement metrics could drive upside.
- UnitedHealth Group (UNH): Healthcare services and insurance margins are expected to beat forecasts.
- Arista Networks (ANET): Network equipment demand may surprise analysts positively.
- Robinhood (HOOD): Earnings could reflect higher trading activity and monetization.
For these names, investors could consider buying slightly out-of-the-money call options, profiting if results exceed expectations and stock prices surge post-earnings.
Stocks to Watch for Potential Declines
Goldman also flagged stocks where post-earnings weakness could create opportunities for put options:
- Texas Instruments (TXN): Margin pressures may weigh on results, potentially leading to a stock pullback.
- Southwest Airlines (LUV): Rising costs and fluctuating demand could result in disappointing earnings.
Investors could consider out-of-the-money puts to benefit from declines or hedge existing positions in these names.
How to Implement a Post-Earnings Options Strategy
Goldman suggests several practical approaches:
- Select stocks with strong expected earnings reactions. Look for names with historically high earnings volatility or fundamental catalysts.
- Use out-of-the-money options. These require less capital and offer leverage if the stock moves significantly.
- Set expiration dates carefully. Options should cover the period immediately after the earnings report to capture the price swing.
- Consider hedges. If holding stocks, buying calls or puts can limit downside risk while maintaining upside potential.
Investors should also monitor implied volatility trends, as options pricing may underestimate actual post-earnings swings. A low implied volatility environment can make buying options more attractive.
Sector-Level Strategy Insights
- Utilities: Expect continued short-term swings due to energy pricing and regulatory updates.
- Healthcare: M&A announcements and policy changes can amplify earnings reactions.
- Materials/Industrials: Watch macro indicators like manufacturing data, commodity prices, and supply chain disruptions.
- Technology: Focus on individual company catalysts, as sector-wide volatility has decreased.
By combining sector trends with stock-specific analysis, traders can refine their options strategies to maximize risk-adjusted returns.
Bottom Line: Options Can Amplify Earnings Opportunities
Goldman Sachs emphasizes that options are a powerful tool for earnings season, offering both leverage and flexibility. While the market anticipates low post-earnings volatility, the bank believes fundamentals suggest larger moves are possible, creating opportunities for investors who position strategically.
For bullish trades, consider call options on companies expected to beat expectations, such as Meta, UnitedHealth, Arista Networks, and Robinhood. For bearish trades or hedges, puts on Texas Instruments and Southwest Airlines could provide protection or profit from downside moves.
As always, earnings-driven trades carry risk, particularly if actual results deviate from expectations or if volatility fails to materialize. Proper risk management, position sizing, and strategic use of options can help investors take advantage of one of the most dynamic periods in the market calendar.
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