One of the oldest and best ways to get leverage for stock trading is to utilize the options markets. While to some it may seem like an exotic (and dangerous) way to trade, in reality using options can offer a much lower cost scenario to own a larger position. Each call option contract represents 100 shares of a stock. So, five contracts equal 500 shares, 10 contracts would equal 1,000 shares and so on.
In a new research report, Goldman Sachs screened its Buy-rated stocks looking for companies with reasonable options prices and where the stock has lagged the recent, technology-driven upside move. The report noted this:
Investors have turned optimistic on the equity markets with broad market indices like S&P 500/NASDAQ already recording a strong +11%/+22% rally over the past 3 months respectively (+14%/+37% year-to-date). This has coincided with a decline in single stock volatility, which now hovers near a 3 year low, driven by a multitude of macro factors including receding recession fears, easing interest rate uncertainty, healthy employment and declining inflation. Given this backdrop, we see a potential rally in stocks where Goldman Sachs analysts are Buy rated and option prices are attractive, but investors are not yet bullishly positioned.
Ten top companies made the list, and five look very attractive now on a risk-reward basis. They also offer the biggest potential upside when investors buy 12-month “at the money” calls. While all are Buy rated at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
For options traders, here is the methodology for the implied returns from Goldman Sachs analysts:
Implied returns on buying 12-month over-the-counter, at-the-money calls on Goldman Sachs buy-rated large-cap liquid stocks that are year-to-date laggards, where 6-month implied volatility is below median levels and 6-month normalized put-call skew is above median levels; Prices of 12-month OTC at-the-money calls; Call prices at mid-mkt; 6-month 50 delta call implied volatility and 1-yr percentile ranks.
This top company remains a solid pharmaceutical stock to own long term and is offering an outstanding entry point after a big tumble. Bristol Myers Squibb Co. (NYSE: BMY) discovers, develops, licenses, manufactures and markets pharmaceutical products worldwide in the hematology, oncology, cardiovascular and immunology therapeutic classes.
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