Bloomberg News

Buy Calls on Market Laggards Before Earnings, Goldman Sachs Says

December 10, 2011

Dec. 6 (Bloomberg) -- Buying call options on stocks that did worse than the overall market before their earnings period has been “consistently profitable” over the past 15 years, according to Goldman Sachs Group Inc.

Adobe Systems Inc. and Ciena Corp. are among stocks reporting earnings in the next month that have performed worse than the Standard & Poor’s 500 Index and have call options screening as “inexpensive,” equity derivatives strategists John Marshall and Katherine Fogertey wrote in a note today. Jabil Circuit Inc., Darden Restaurants Inc. and Smithfield Foods Inc. options appear attractive because implied moves are lower than the average for the past eight quarters, they said.

“Recent underperformance may give way to a ‘relief rally’ on earnings” for some shares, the New York-based strategists wrote. “Stocks that underperformed in the two weeks ahead of their earnings event period tended to outperform by more during their earnings event period than stocks that outperformed in this prior period,” they said. “Earnings event call-buying opportunities have been more profitable for these stocks.”

New York-based Goldman Sachs defines the earnings event period as starting five days before the report. Buying calls five days before a company reports earnings has been more profitable than purchasing only the stock in nine of the past 15 years, Goldman Sachs strategists said in a July report.

S&P 500 profits have exceeded analyst estimates by an average of 4.6 percent in the current reporting period, the 11th straight quarter of better-than-expected earnings, data compiled by Bloomberg show. The benchmark gauge for U.S. stocks fell less than 0.1 percent year-to-date through yesterday.

Stocks that trailed the market by at least 3 percentage point in the two weeks before their earnings event period tended to beat the market after their profit reports more than shares that had beaten the market in the lead-up to their reports, according to data on stock and option moves over 15 years compiled by Goldman Sachs.

--With assistance from Roger Neill in London. Editors: Joanna Ossinger, Michael P. Regan

To contact the reporter on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Andrew Rummer at arummer@bloomberg.net


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