April is company preannouncement season and Goldman has a way to trade it
Wall Street still has a few weeks before the next earnings season hits full stride, but options traders can try to profit off the preliminary reports that may trickle out in the meantime, according to Goldman Sachs. John Marshall of the firm's derivatives research team said in a March 27 note that earnings preannouncements have been a notable source of volatility in the opening months of 2024. "We estimate there have been 433 preannouncements year-to-date and the average stock has moved +/-6.8% on the two days around these events," he wrote. "This year stocks made positive moves following these events 57% of the time." Further, a potentially busier time for those corporate disclosures is coming up. April sees about 10% of all preannouncements for a given year on average, according to Goldman Sachs. Given that earnings announcements can cause stock volatility, whether they are scheduled or not, this could create an opportunity for options traders to capitalize. Goldman identified stocks have preannounced in April at least twice since 2011, at least once in any month during the past two years, and have attractively priced options. "Given the mostly unplanned nature of these events, we believe investors underestimate their associated volatility," the note said. Two companies that have made a habit of preannouncing in April are CNX Resources and Delta Air Lines . CNX, a natural gas company, has announced preliminary results in April four times since 2011, according to Goldman, while Delta has done so three times. The airline appears to be particularly aggressive with its preannouncements. Delta has done so six times over the past two years, not just in April. And Delta's stock has shown that it can see big swings on earnings-related news. Shares fell about 9% on Jan. 12 when the company announced its fourth-quarter results and trimmed its 2024 forecast. The stock has since erased that drop, but the sharp one-day move likely created some winners among options traders. DAL YTD mountain Shares of Delta Air Lines have rebounded since their Jan. 12 decline. Other companies like hospital conglomerate HCA Holdings and Fidelity National Information Services have done preannouncements in each of the last two years. Health care is a sector that sees a higher-than-average number of preannouncements, according to Goldman, which could bode well for traders interested in HCA. Consumer discretionary is another area that often sees a high number of preannouncements. Best Buy is one of the big consumer brands on Goldman's list. The retailer has done two April preliminary announcements since 2011. Of course, these early announcements can be good or bad news for the stock, but the options trade indicated by Goldman may work in either case. The note highlighted the at-the-money straddles for each stock, with the expiration date coming after the scheduled earnings date. Straddles are effectively a call option and a put option on the same stock with the same strike price. Straddles are more expensive up front than single-direction options, but they can make money whether a stock rises or falls. The trader takes no risk other than the premium paid up front to buy the options contract.