GOLDMAN SACHS: Make these 4 bullish option trades to completely crush this earnings season, even as single-stock calls skyrocket relative to puts

  • Stock options are now 120% of the underlying shares market, according to Goldman Sachs.
  • Call volumes have been rising relative to puts over the last 10 months.
  • We list 4 tactical option trades to make according to the firm, and 25 stocks with high call open interest
  • Visit the Business section of Insider for more stories.

The spotlight is on options trading.

Many retail investors have been leveraging options trading as part of their strategy to push up the price of GameStop and other small-cap stocks that had been shorted by hedge funds.

Options are considered a sophisticated investing strategy to be used only by experienced investors and traders. However, in recent years they have become more accessible to retail investors through the rise of digital brokerages and investing applications, such as Robinhood.

Read more: Reddit day traders are taking on hedge-fund giants and winning, and it’s a sign of a new era for markets

The rise of the retail investor trading is drawing comparisons to the 1990s and the dot-com boom. However, some experts believe a key differentiator between now and the 1990s is the rise in option investing from retail investors.

A new research report from Goldman Sachs released on February 3 said that stock options are now 120% of the underlying shares market.

“This growth has been broadly skewed towards calls; call volumes relative to puts rose to 2020 highs in August, while the past two months have seen investors once again reaching for calls over puts,” said Goldman Sachs equity analyst, Vishal Vivek in the report.

Read more: As Redditors flood the stock market, UBS breaks down 6 options strategies investors can use right now to protect their portfolios

Call volumes have been rising relative to puts over the last 10 months, with a peak occurring in August, Vivek said. 

Since the US Presidential election, the firm is now seeing trading activity in single stock calls relative to puts increase again.

“Following the expiry, investors once again initiated more positions in calls relative to puts, driving up the skew to the highest level since 2018,” Vivek said.

What are options?

There are two main types of option, a put and a call.

Put options give their holder the right, but not the obligation, to sell an asset at a specific price within a specific time period. Investors often use put options as a form of investment insurance to ensure losses do not exceed a certain amount.

Calls give the buyer the right, but not the obligation, to buy a stock at a specific price within a specific time period.  When an investor sells a call, this involves owning the stock while at the same time giving someone else the right to buy your holdings.

When there are more puts than calls this tends to indicate a bearish outlook. On the other hand, more calls relative to puts demonstrates a bullish outlook.

Stocks with high open interest

In the research note, Goldman Sachs breaks down the top 50 stocks with high call open interest relative to puts over the past month.

“For the average stock on this list, 66% of daily traded volumes are calls, while 53% of notional open interest is in calls,” Vivek said.

Here is the top 25 stocks from the list sorted based on the call minus put open interest:

  1. Apple
  2. Amazon
  3. Alibaba
  4. Facebook
  5.  Microsoft
  6.  Alphabet Inc Class A (GOOGL)
  7.  Alphabet Inc Class C (GOOG)
  8.  Walmart 
  9.  Boeing Co
  10.  Disney
  11.  Johnson & Johnson
  12.  General Motors
  13.  Salesforce
  14.  Visa
  15.  Taiwan Semiconductor Manufacturing
  16.  Advanced Micro Devices
  17.  Zoom video communications
  18.  Baidu
  19.  Bank of America
  20.  PayPal
  21.  Mastercard Inc
  22.  Nio
  23.  IBM
  24.  Moderna Inc
  25.  Micron Technology

Goldman Sachs also listed 9 stocks that go into negative territory, with higher put open interest relative to calls, Tesla is the highest with -$56 billion call minus put open interest.

1. Tesla

2. Gamestop

3. Chipotle Mexican Grill

4. Nvidia

5. Beyond Meat

6. Netflix

7. Mercadolibre Inc

8. Snowflake Inc

9. DuPont de Nemours Inc

But despite this skyrocketing interest in call options, Goldman Sachs still sees four tactical trades investors can make this earnings season.

Tactical trades

1. General Motors

Ticker: GM

Trade: “Buy calls ahead of GM earnings on Feb 10th; our analyst sees 33% upside to consensus EPS estimates.”

Analyst comment: “GM one-month implied volatility of 58 is only 2 points above one month realized volatility. The stock has traded lower since its mid-Jan peak, and has underperformed the broad S&P500 by 5% over the past 2 weeks, increasing the potential for mean reversion. Driven by our analyst’s positive view on the quarter, we recommend investors buy the GM Feb-21 $53 calls recently offered at $2.59 (5.0%, stock $52.72). Call buyers risk losing premium paid if stock closes below strike price on expiration.”

Source: Goldman Sachs

2. O'Reilly Automotive Inc

Ticker: ORLY

Trade: “Buy calls ahead of ORLY earnings on Feb 10st; solid execution and share gains are likely to drive upside.”

Analyst comment: “ORLY options implied move for earnings is +/- 4.5%, only inline with the historical 8Q average earnings day move. One month implied volatility of 38 is only 3 points above one month realized volatility. With the stock underperforming the broad S&P500 by 15% over the past 3 months, we recommend investors position for upside with long ORLY Feb-21 $450 calls recently offered at $13.60 (3.1%, stock $444.97). Call buyers risk losing premium paid if stock closes below strike price on expiration.”

Source: Goldman Sachs

3. Bloomin' Brands

Ticker: BLMN

Trade: “Buy puts ahead of BLMN earnings on Feb 18th; our analyst believes the company’s largest brand Outback is losing share to Steak industry peers.”

Analyst comment: “BLMN one month implied volatility of 64 is only in the 36th percentile relative to the past year, implying little positioning ahead of earnings. One month normalized put-call skew is only at median levels relative to the past year, implying put prices are attractive, despite earnings-driven risks. With options prices attractive relative to history we recommend investors buy the BLMN Feb-21 $20 puts recently offered at $0.55 (2.5%, stock $21.98). Put buyers risk losing premium paid if stock closes above strike price on expiration.”

Source: Goldman Sachs

4. Mattel

Ticker: MAT

Trade: “Buy straddles ahead of MAT earnings on Feb 9th; option prices are only inline with history, despite potential for a volatile report.”

Analyst comment: “MAT one-month implied volatility of 58 is only 3 points above its 1yr average. Options are implying +/-11% move on earnings, only inline with the historical 8Q earnings-day move. Implied moves are driven by options across strikes and terms, usually driven up by investors buying expensive out-of-the-money (OTM) options. With MAT options in-line with historical realized moves, we believe straddle prices are low, and recommend investors buy the MAT Feb-21 $18.50 straddles, recently offered at $2.20 (12.0%, stock $18.41). Straddle buyers risk losing premium paid if the stock closes at strike price on expiration.”

Source: Goldman Sachs

Read more:

  • MORGAN STANLEY: Buy these 8 stocks set to completely crush their earnings in February
  • Buy these 4 stocks poised benefit from a spike in silver prices, says RBC Capital Markets — including 2 set to soar 73%
  • Buy these 13 stocks poised to benefit from a boom in 5G smartphone adoption, UBS says — including one expected to surge 69%

Get the latest Goldman Sachs stock price here.

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