Goldman Sach’s Earnings Option Strategy

The Striking Price column in Barron’s published over the weekend was interesting. The key insight in it was a quote from Goldman Sachs options strategists Stuart Kaiser and John Marshall who wrote “The degree of consensus -estimate revisions has been a good indicator of realized earnings day stock volatility over the past 12 years.”

The Goldman Sachs researchers go on to say that 75% of the “Standard & Poor’s Index stocks have withdrawn guidance”. It doesn’t say if that is the S&P 100 or S&P 500. So if the company withdraws guidance, analysts have to make up their own minds what earnings are going to be. That would increase uncertainty. Furthermore, if the analysts are revising their estimates very often, that shows that they are very uncertain about earnings.

The author, Steven Sears, makes it easy to test this hypothesis this quarter since he has listed their recommendations. These companies have said their earnings will be better than expected: Marvel Technologies (MRVL), Mylan (MYL), Best Buy (BBY), Symantec (SYMC), Altria (MO), Northern Trust (NRTS), AutoZone (AZO), and TJX. He goes on to say that one should buy calls on these companies before the earnings come out.

First Two Data Points

Northern Trust announced earnings yesterday before the market opened. On Friday, NTRS closed at 63.06, on Monday it closed at 58.15 and Tuesday it opened at 51.79 went as high as 56.23 and as low as 49.78 and closed at 56.17. That is down $2 from Monday’s close so buying options Monday and selling Tuesday would have been a losing trade. The implied volatility dropped also after earnings were announced.

Altria (MO) announced earnings this morning. It’s trading range so far is 16.46 – 16.84. Not volatile enough to profit from a straddle bought last night.

Two trades doesn’t negate the argument. This is just the first two data points.

Buy Straddles

He also suggests buying straddles on those companies that “have retracted earnings guidance”. Included in this list are Molex (MOLX), Johnson Controls (JCI), Applied Materials (AMAT), Abercrombie & Fitch (ANF), Legget & Platt (LEG), Fortune Brands (FO), Coventry Healthcare (CVH), BJ Services (BJS), and Union Pacific (UNP).

Buy Puts

The last group of stocks he discusses are of companies that have lowered earnings guidance. For those he suggests buying puts. This certainly makes sense if you own the stock. It it would be profitable as an option trading strategy, we will have to see. This group of stocks contains: Texas Instruments (TXN), Ingersoll-Rand (IR), Eaton (ETN), International Paper (IP), National Semiconductor (NSM), Sandisk (SNDK), Illinois Tool Works (ITW), Massey Energy (MEE), Parker Hannifin (PH), Estee Lauder (EL), Time Warner (TWX), CSX, and Norfolk Southern (NSC).

Texas Instruments

Texas Instruments announced earnings Monday evening. At the close of the regular trading session Monday, a share of TXN cost 17.32. Tuesday morning, it opened at 17.65. So if you had bought a 17 strike put near the close Monday, you would have been disappointed Tuesday morning. It traded yesterday between 16.61 and 17.85. So you would have been profitable at some point during the day. But that is a day trade not an earnings trade.

So far, Sears and Goldman Sachs is 0 for 3.