Goldman Looks At This Week's Options Activity In Apple, Seagate And Visa

Low earnings expectation, combined with stocks moving more on earnings than on the non-earnings period, makes it more attractive to own options around earnings. Goldman Sachs’ Katherine Fogertey identified three important stocks for which “volatility is most underpriced relative to our out-of-consensus fundamental expectations.”

Apple: Buy Calls

Apple Inc. AAPL is scheduled to report its earnings on April 25. Analyst Katherine Fogertey expects the event to be a bigger-than-anticipated positive catalyst for the company’s shares. Goldman Sachs’ Simona Jankowski projected 40 percent upside to Apple’s shares over the next 12 months, and rated the stock as Conviction List-Buy.

The quarter is likely to be a positive catalyst for shares, with greater optimism on the company’s shareholder return plans and due to underlying demand for Apple products. While the analyst expects management to report a “beat and raise quarter,” she mentioned that the biggest driver of upside would likely be iPhone sales, which are estimated at 53.6mn units, above consensus of 50.0mn units.

Referring to Apple’s share buyback plan, analyst Simona Jankowski modeled an increase of $50bn to the cumulative total of $250bn. Apple may guide F3Q revenues to $46.5-$48.5bn, which is likely to prove conservative, with a survey pointing at strong demand into the June quarter.

“Buy calls for a likely positive earnings report. Buyers of calls require a +3% move by expiration to profit, less than the prior 8 quarter realized moves of +/-4%. Call buyers risk losing premium paid if shares close below the strike price at expiration,” Fogertey wrote.

Seagate: Buy Puts

Fogertey recommended to buy puts, saying that options are currently underestimating the negative risks to shares of Seagate Technology PLC STX around earnings. Goldman Sachs’ Mark Delaney projected a 14 percent downside to the company’s shares over the next year, and rated the stock as Sell. He expects Seagate to report its quarterly earnings 5 percent below consensus.

Seagate’s shares have gained 31 percent since January, indicating that “investors are overlooking the seasonality in HDD unit growth, not to mention the elevated PC supply chain inventory and SSD share gains,” analyst Mark Delaney commented.

Fogertey added that option investors appear to be factoring in low risk to the quarter. She added, “Consider one month normalized skew that is just at average levels and the fact that options are pricing in a +/-3% move, just in-line with the average move over the prior 8 quarters. Put buyers risk losing premium paid if shares close above the strike price at expiration.”

Visa: Buy Calls

Visa Inc V is scheduled to report its earnings on April 21. Goldman Sachs’ James Schneider expects the company to post robust results, and rated the stock as Conviction List-Buy.

Schneider mentioned that there is likely to have been a modest acceleration in retail trends so far in 1Q, which is better than Street expectations, “driven by an uptick in discretionary spending owing to lower gas prices benefiting low-end consumer categories.” Moreover, Visa has witnessed a massive shift toward ecommerce.

The analyst enumerated the main drivers for positive estimate revisions as: (1) market share gains in the US (2) significant market expansion opportunity in Europe (3) potential domestic transaction processing in China.

“Options are pricing in a +/-4% move for earnings, which is just in-line with the prior earnings moves (8 quarter median), however one-month normalized skew is just at average levels, which suggests option investors are not yet expressing a strong directional view. Call buyers risk losing premium paid if shares close below the strike price at expiration,” Fogertey wrote.