Investors should buy options on U.S. energy stocks before the Institute for Supply Management’s manufacturing report tomorrow because the shares may have larger-than-average swings, Goldman Sachs Group Inc. said.
Equity derivatives strategists John Marshall and Maria Grant recommended buying options on 25 stocks, including Chesapeake Energy Corp. and Noble Energy Inc., that historically have had above-average price moves on days when ISM data are released and whose options are “inexpensive.”
“Energy companies tend to dominate the list of those that make unusually large moves on ISM day,” the New York-based strategists wrote. “A decline in the ISM could be a negative headline that causes volatility.”
Manufacturing probably cooled in September with ISM’s factory index falling to 54.5 from 56.3 in August, according to the median of 82 forecasts in a Bloomberg survey before the report. Goldman Sachs’ economists estimate 54. A reading above 50 signals growth for Tempe, Arizona-based ISM’s gauge. The index averaged 53.2 during the expansion that ended in 2007.
The Energy Select Sector SPDR Fund is the most sensitive to ISM reports among nine exchange-traded funds tracking the broadest industries in the Standard & Poor’s 500 Index, according to Goldman Sachs. The ETF rose 2 cents to $56.06 as of 4 p.m. in New York as energy stocks rose 0.1 percent for the only gain among 10 industries in the U.S. stock benchmark.
The energy ETF has moved an average of 2.7 percent up or down on the past 20 ISM release days, 1.76 times its move on an average trading day over the same period. That compares with a 1.7 percent average ISM move for the S&P 500. The 25 stocks recommended by the New York-based firm average a change of 4.7 percent.
“We do not believe this ISM sensitivity is priced into October energy options,” Marshall and Grant wrote. “Both puts and calls appear attractive for investors hedging long and short positions, respectively.”
Goldman Sachs screened for stocks that have one-month implied volatility below median levels over the past year.
Implied volatility is the key gauge of options prices and expected price swings. Options are derivatives that give the right to buy or sell assets at a set price by a specific date. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.
Goldman Sachs recommends buying options on the following 25 stocks: COMPANY (TICKER) Anadarko Petroleum Corp. (APC US) Oshkosh Corp. (OSK US) Noble Corp. (NE US) Apache Corp. (APA US) Valero Energy Corp. (VLO US) Peabody Energy Corp. (BTU US) El Paso Corp. (EP US) Devon Energy Corp. (DVN US) AES Corp. (AES US) Rowan Companies Inc. (RDC US) Cliffs Natural Resources Inc. (CLF US) Noble Energy Inc. (NBL US) Cameron International Corp. (CAM US) Ensco PLC (ESV US) Consol Energy Inc. (CNX US) Freeport-McMoRan Copper & Gold Inc. (FCX US) Williams Companies Inc. (WMB US) Massey Energy Co. (MEE US) Bucyrus International Inc. (BUCY US) Chesapeake Energy Corp. (CHK US) Frontier Oil Corp. (FTO US) CNO Financial Group Inc. (CNO US) Las Vegas Sands Corp. (LVS US) Manitowoc Company Inc. (MTW US) U.S. Steel Corp. (X US)