To The Moon

Goldman Sachs once again recommends straddle options for the upcoming earnings season. Goldman Sachs has released a list of 20 companies, believing that investors are underestimating the earnings day volatility of these targets. Buying straddles is particularly attractive, especially for $Meta Platforms, Inc.(META)$ , $Netflix(NFLX)$ , $Cloudflare, Inc.(NET)$ and $American Express(AXP)$

META options imply a move of +/-7.8% on earnings-day, well below its 8Q average earnings-day move of +/-14.1%. One-month normalized put-call skew is in its 10th percentile relative to the past year, indicating bullish positioning by option investors. Goldman Sachs recommends buying META straddles expiring on May 3rd, with a strike price of $500.

Other specific names on the list include:

Straddle options are commonly used to speculate on earnings because it's a non-directional strategy, involving buying both call and put options. As long as the stock price moves significantly, the gains on one side cover the costs on both sides and generate additional profits.

Before, I introduced two types of straddles: Straddle and Strangle:

Straddle, also known as saddleback, involves buying call and put options with the same strike price and expiration date, typically close to the current price (ATM). This strategy's main advantage is speculating solely on volatility without predicting direction. However, if the stock price doesn't move significantly, the risk lies in the inability to offset the cost of buying two options.

Strangle is an asymmetric straddle option, also known as a wide straddle. Unlike Straddle, it involves buying call and put options with different strike prices but the same expiration date, typically out-of-the-money (OTM). Profits can be made when the price breaks through a certain range (whether up or down), betting on volatility. This strategy is suitable for stocks with highly volatile prices, typically growth or tech stocks.

Straddle options are more expensive than buying individual call or put options because they involve buying two contracts. Therefore, the biggest risk is if the volatility falls short of expectations, and one side's gains are insufficient to cover the cost of both sides, resulting in a loss. However, as an option buyer, the maximum loss is limited to the premium of the two contracts.

To summarize, straddle options are a volatility play, a direction-neutral strategy. By purchasing them a week before earnings and benefiting from the significant stock price fluctuations after the earnings release, investors can achieve excess returns. They can also sell for profit on the day before earnings when option IV reaches its peak. For specific details, please refer to the two articles mentioned above.

Typically, stocks with large price fluctuations report significant earnings, such as Netflix and Tesla. NFLX will release its earnings after market close on April 18th, and $Tesla Motors(TSLA)$ will do the same on April 23rd.

After the last earnings release, NFLX's stock price surged by over 10%. If both its call and put options were purchased simultaneously, the gains from the call would cover the costs of both the call and put.

Following the previous earnings release, TSLA's stock price plummeted by 12%, with the put option doubling in value, resulting in substantial gains.