Netflix, Amazon Option Straddles Before Earnings A Win-Win

Netflix and Amazon are a good trade and will pay off if they rise or fall post-earnings, according to Goldman Sachs. The firm is advising its clients to aggressively trade both firms’ shares ahead of their earnings reports, says a report from Online Barron’s by Steven M. Sears.

Goldman Sachs advises ‘Straddle Strategy’

Goldman says there is a variance in how the options market is pricing both the stocks, thus allowing traders to use strategies on the stock. Goldman Sachs wants its clients to play the “straddle” strategy, which means buying a put and call with the same strike price and expiration. This strategy means investors can profit if the stock moves up or down. This strategy is a proven one because a put increases in value if the stock drops, and a call spikes if the stock surges.

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Netflix trend suggests that over the past eight earnings reports, the online streaming firm on average has moved 13% up or down in response to the earnings. However, currently the options market is reflecting as if the stock will move 9% up or down, says the report.

Amazon, on the other hand, has moved 10% up or down in reaction to earnings news in the past. In the options market, Amazon shares are priced as if they will swing around 8%.

How to trade Netflix and Amazon?

Katherine Fogertey and John Marshall, Goldman Sachs’s derivative strategists, believe that the options market  Netflix and Amazon before the earnings, are advising clients to buy Netflix and Amazon options.

For Amazon, Goldman is suggesting clients buy the August $435 put and call at a total cost of $45.55 (when the stock was at $434.09). According to the analysts, Amazon will come up with the earnings on July 24th, but the company has yet to officially reveal a date. The analysts note that buying an Amazon straddle five days before the earnings, and closing the position a day after earnings gave an average profit of 25% over the past eight quarters, says the report.

For Netflix, the investment bank advices clients to buy Netflix July $657.50 put and call for a total cost of $66.95 (when the stock was at $656.94). The streaming firm will report earnings on July 2015. Goldman Sachs notes that buying a Netflix straddle five days before earnings and closing the day after earnings has resulted in an average profit of 60% over the past eight quarters.