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Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility

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Apr. 15 2021, Published 12:42 p.m. ET

So far, 2021 has brought about a change in investor sentiment that has seen rotation out of growth stocks and into value plays. However, this shift has left some good stocks undervalued. 

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Goldman Sachs thinks that the current earnings season could be a good opportunity for some of these underperforming stocks to catch up. What are Goldman Sachs's options trade picks

Goldman Sachs's options trade picks

Goldman Sachs thinks that the stock rotation has created significant opportunities in some stocks. The bank’s derivatives team has identified buy-rated stocks that are underperforming the market and could rally during the earnings period.

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options trade picks
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Morgan Stanley (MS): Goldman Sachs analysts see a 10 percent upside in this stock over the next year. The firm advises buying May calls for MS with a strike price of $80 per share. 

Activision Blizzard (ATVI): Since Goldman Sachs's video game analyst projects a strong quarterly report from ATVI, the firm recommends buying May calls at $97.50 per share. 

AT&T (T): For the giant media conglomerate, Goldman Sachs's derivatives team recommends buying a straddle of May options with a $30 strike price.

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Calls versus puts versus straddle

Several derivative instruments like calls, puts, and straddles allow investors to get exposure to the price movements of the underlying investment. For example, call options give the holders the right to buy the stock at a specific strike price in the future. If holders expect the price of a security to go up in the future, buying call options is recommended. Put options allow holders to sell a stock at a specific price in the future. They become more valuable as the stock price goes down.

Straddles allow users to buy a call and a put at the same strike price for the same expiration date. These trading instruments make sense if the trader thinks that the market is undervaluing potential volatility but isn't sure in which direction the stock will go.

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Earnings for MS, ATVI, and T

Morgan Stanley is scheduled to report its earnings on April 16 with the call scheduled for April 17. The company has beaten analysts’ expectations three times out of the last four quarters. For the first quarter of 2021, analysts expect the company to report an EPS of $1.7 compared to $1.01 in the previous year quarter. According to Goldman Sachs, the implied volatility of the stock is 30, which is only in its 10th percentile relative to the past year. Also, according to Forbes, as of April 14 morning, implied volatility for the stock was at its lowest level of the past 52 weeks.  This means muted positioning in the stock ahead of the earnings. 

Activision Blizzard is scheduled to report its earnings on May 4. It's expected to report an EPS of $0.70—a growth of nearly 21 percent YoY. Goldman Sachs rates ATVI as a buy. In January 2021, Goldman Sachs analyst Michel Ng raised the target price for the stock from $80 to $110. He noted that proxies for engagement reached record levels during the fourth quarter of 2020 and surpassed levels achieved during the height of the COVID-9 pandemic. 

The analyst sees a strong quarter from ATVI on the back of the Call of Duty franchise that could fuel a beat for the company. However, the stock has mainly been trading sideways since mid-February. This disconnect fuels Goldman Sachs's recommendation of buying options for the stock.

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earnings and stock forecast
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AT&T is set to announce its earnings on April 22. Analysts forecast an EPS of $0.77 for the stock for the first quarter. The company has managed to beat analysts' expectations twice out of the last four quarters. The company's new CFO stated in March 2021 that it's on track to exceed the prior outlook for the first quarter. Therefore, AT&T might surprise to the upside with its first-quarter earnings, which would lead to positive price action.

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Stock forecast: MS, ATVI and T

According to Market Beat, Morgan Stanley has a consensus buy rating. Morgan Stanley has 14 buy and seven hold ratings. The average target price for the stock is $68.6, which implies a potential downside of 15 percent. Lately, many firms like UBS, Deutsche Bank, and Barclays have raised their target price for MS to reflect the more positive capital markets backdrop.

ATVI stock has 25 buy ratings from 28 Wall Street analysts covering it, while the rest of the ratings are a hold. The average 12-month target price implies a possible upside of 6.5 percent. 

AT&T is covered by 18 Wall Street analysts. Ten analysts have a buy rating, four have a hold rating, and four have a sell rating for the stock. Its target price of $31.4 implies a potential upside of 5.6 percent. 

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