U.S. equity investors are facing a turbulent four months as the presidential election heats up, and Goldman Sachs analysts scanned their coverage universe and found 38 stocks that investors can use to take advantage of that volatility with options.
Large-cap health insurers and biotechs are at the top the list of stocks analysts led by Vishal Vivek see as swinging the most wildly, and they recommended buying at-the money-straddles. The strategy involves buying a put option and a call option with the same strike price and maturity date, which looks to profit from a jump in volatility.
The recommendations come after the bank’s strategists earlier this week warned that mail-order ballots and Covid-19 disruptions could mean the final vote count gets delayed and roils stocks as investors wait to find out who will be president. In the latest polling Joe Biden has taken the lead with the support of 49.6% of voters, compared with Trump’s 40.9% backing, according to the RealClearPolitics average.
S&P 500 options show traders expect the index to move about 13% between now and the November election, that’s a narrower window than the health-care straddles Goldman is recommending. Biotechs including Amgen Inc., Biogen Inc., Gilead Sciences Inc., Regeneron Pharmaceuticals Inc., AbbVie Inc., Bausch Health Cos., Bristol-Myers Squibb Co., Johnson & Johnson, Eli Lilly & Co., Merck & Co. and Pfizer Inc. could oscillate in percentages from the mid-teens to over 30% between now and the election, according to Goldman’s analysis.
Among health-care companies they list, Bausch Health has the widest expected move between now and January at 34%, the at-the-money straddle has a six-month implied volatility of 57%, which ranks in the 73rd percentile over the last year.
While the battered reputation of drugmakers got a makeover as the sector races to come up with solutions to the Covid-19 epidemic, “how long this ‘goodwill’ lingers is an outstanding question, as we get closer to the November elections,” the analysts wrote in a note to clients.
A Biden presidency could also alter the composition of health insurance, skewing it more toward government-tied insurance. That could drive 18% to 24% share moves for Anthem Inc., Cigna Corp., Humana Inc., and UnitedHealth Group Inc., the analysts predicted. Cigna has the second-highest expected move between now and January among health-care names at 24% and its six-month implied volatility of 39% ranks it in the 76th percentile.
Energy is another key sector to watch. Biden’s plans around renewables could give stocks like First Solar Inc., Sunrun Inc., SunPower Corp. “a material boost,” while Concho Resources Inc., Devon Energy Corp., EOG Resources Inc. face the risk of tightened drilling regulations on Federal lands, Goldman said. The analysts also recommended hedging bets on legislative catalysts for Avangrid Inc., Pinnacle West Capital Corp., CVR Energy Inc., HollyFrontier Corp., PBF Energy Inc., Valero Energy Corp.
They also identified stocks that may move on state ballots with “meaningful catalysts, but are likely under the radar of most generalist investors.” Propositions on employment rules will shake Lyft Inc. and Uber Technologies Inc. while DraftKings Inc. will hinge on votes over legal betting in states including Louisiana, Ohio and Massachusetts.
DraftKings has rallied 71% year-to-date and the November at-the-money straddle shows options investors expecting shares to move 50% between now and expiration. The analysts noted the online gambling company’s 6-month implied volatility of 94%, ranks it in the 54th percentile on a one-year basis.
© Copyright 2024 Bloomberg News. All rights reserved.