Goldman Sachs Found an Earnings Season Strategy

It’s been a difficult earnings season for companies and traders alike.

For companies, nothing has been good enough. Not earnings beats, nor better-than-expected sales. Firms that have exceeded expectations in both areas have still seen their stocks fall. It’s the first time in 18 years that’s been the case.

Meanwhile, investors have been left grappling with price swings that have been far more drastic than usual. Goldman Sachs finds that the average earnings-related move for S&P 500 companies has been 4.5%, the highest since the third quarter of 2009.

While that sort of volatility can sometimes be beneficial to traders, that hasn’t been the case this season, as the stock market has dealt with bouts of extreme selling pressure.

However, amid the turbulence and uncertainty, one strategy formulated by Goldman has generated monster returns — and for a very minimal time commitment. It’s one that, unsurprisingly, involves leaning into the negative trend seen across the market during much of October.

Goldman’s strategy is as follows: An investor buys the closest out-of-the-money, one-month listed put contract on a stock five days before earnings. Then, one day after the report, they close the trade. (Note: A put contract is a wager than a stock will fall.)

On an average basis, the trade has returned a whopping 107%. That’s more than double an investor’s money — in just six days. This incredible performance makes the trade the most profitable it’s been since the financial crisis.

As if that wasn’t enough, Goldman has another market-beating strategy up its sleeve — one that’s designed to capture single-stock volatility in either direction.

The trade involves buying the closest one-month straddle five days ahead of earnings, then closing it one day after. So far this season, it’s created returns of 35%. Not too shabby.

With all of this established, it’s important to note that former trade’s success isn’t guaranteed to continue going forward — at least to the outsized degree it’s already enjoyed. The market’s overall tone and direction are key variables in the equation. Considering that stocks appear to be rebounding, it’s possible that the money-making potential of the 107% trade will ebb going forward.

But that doesn’t make it’s incredible track record so far any less impressive. Ultimately, it shows that proactive traders can make money even during difficult markets, so long as they sense which way the wind is blowing and position accordingly.