With stock volatility hovering near a pre-financial crisis low, some investors might see an opportunity to take a breather. To thederivatives strategists at Goldman Sachs, it's an opportunity to reap outsized gains.They recommend using the share price fluctuationsnormally associated with earnings season to one's advantage. The key is identifying stocks for whichexpected post-earnings moves arebeing underpriced relative to recent history, Katherine Fogertey and the Goldmanderivatives team wrote in a client note on Wednesday.The firm'spreferred vehicle for betting on earnings is an options straddle, whichinvolvesthe purchase of both call and put contracts. Then, if the stock price moves up dramatically, a trader can use the call option to buy shares at a big discount, while if the price drops far enough, the put option will instead turn a profit.The strategyultimately makes money as long as the underlying stock sees a significant move, regardless of direction, making it ideal for something as unpredictable as an earnings report.Of course, this isn't as easy as it might sound. Buying straddles on stocks in an indiscriminate fashioncan be an exercise in futility if the call and put options are appropriately priced, and are correctly factoring in the likelihoods of big up or down share moves. But not all options are optimally priced, and those are the companies to target, says Goldman, which notes that it's still a "very rare" occurrence.Goldman found that earnings season is a good time to try this strategy. The firm looked at more than 25,000 corporate earnings reports since 1996 and found that investors who bought straddles five days before earnings and closed the trades one day after made an average profit of 24% with a successrate of 56%. They ran a similar analysis more broadly for all stocks and saw an average profit of just 2% with a successrate of only 35%.This earnings season, the following five companies have caught the firm's eye, with options suggesting smaller or comparable up-or-down moves in their stock prices than have happened after recent earnings reports:GrubHub (GRUB), reporting April 27 ' Options implying a 10% move vs.11.3% median earnings move over the past eight quartersParker-Hannifin (PH), reporting April 27 ' Options implied move 3.4% vs. 3.3% median 8Q earnings moveFireEye (FEYE), reporting May 2 ' Options implied move 11.2% vs. 12.1% median 8Q earnings movePioneer Natural Resources (PXD), reporting May 3 ' Options implied move 4.2% vs. 4.2% median 8Q earnings moveUniversal Display (OLED), reporting May 4 ' Options implied move 7.2% vs. 9.3% median 8Q earnings moveWhile the CBOE S&P 500 Volatility Index was alreadytradingwell below historical averages overthe past few months, it's been particularly low in recent trading sessions after the first round of the French election passed without any major surprises. After closingat 10.76on Tuesday, the VIX is just 1.5 pointsfrom an all-time low reached in December 1993.SEE ALSO:The market's fear index is plunging at the fastest pace since Trump's electionJoin the conversation about this storyNOW WATCH: Warner Bros. might have to pay $900 million if it can't prove ghosts are real
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