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Goldman Sachs: Earning Straddles

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

This segment further examines the claim made in a recent Barrons article (“Netflix, Amazon Trade Is a Win-Win: Goldman” 7/1/15) by derivative strategists for Goldman Sachs that buying straddles before an earnings announcement and selling afterwards is profitable. So far the studies tastytrade has run contradict the Goldman claim.

The Goldman strategists claimed that there is a “sticker shock” associated with the options on stocks above $100 which leads to a “pricing anomaly” that causes an opportunity that can be exploited. They cited, as an example, outsized gains in AMZN and NFLX over the last 8 quarters. They further claimed that buying straddles in stocks that trade above $100 five days prior to earnings and closing out after earnings produced positive returns in 14 of the last 19 years and five of the last eight quarters.

A study was conducted from 2002 to present buying straddles five days before earnings and selling them after the release of the earnings. A total of 158 stocks were covered that were trading over $100 with a total of 955 occurrences (from the original 17,966). All the stocks chosen had open interest greater than 500.

Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista to see the results of the study to determine if the trade idea suggested by the Goldman Sachs derivative strategists is profitable or not.

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