- The results of the G20 meeting are expected to send ripples through the stock market. But those fluctuations will largely hinge on how constructive the talks are.
- Goldman Sachs has uncovered multiple low-risk, high-reward trading strategies to help investors navigate the uncertain landscape.
But in an investing landscape with so much going on, it can be difficult to pinpoint which areas of the market are the most vulnerable to new trade-war headlines.
That’s where the derivatives strategy team at Goldman Sachs comes in. The firm has studied the seven periods of volatility surrounding various trade-war headlines this year, and it’s identified a 21-company basket of stocks it says is particularly exposed to new developments.
Those seven instances are outlined in the chart below, which also shows that the select group has trailed the S&P 500 by nearly 40% since March.
With these stocks identified, it would seem the most prudent approach is to avoid them entirely. But Goldman has other ideas. It says traders can make relatively low-risk bullish bets on these stocks, which could end up paying off in spades if the G20 meeting is more constructive than expected.
If this happens, it could trigger a rebound in the trade-war-exposed group, leading to gains for investors positioned accordingly. As such, Goldman recommends buying calls on each of the 21 companies included.
What makes this strategy even more appealing is the lack of downside risk. Goldman notes that, even if trade tensions ratchet higher during the G20 meeting, the worst that could happen is traders losing the premium they paid for options — which they calculate at roughly 3%.
“We are not making a call on the outcome of trade talks and the G20, but we see an opportunity in the options market for investors to express a view that trade news could be more constructive than feared by buying calls on the stocks that have lagged,” the firm’s strategists wrote in a recent client note.
So what stocks are actually included in the group? Here’s Goldman’s full list, ranked in order of cheapest 1-month calls betting on a 5% increase in the underlying stock.
But Goldman’s recommendations don’t end there. The firm also says investors should consider buying calls on exchange-traded funds that have exhibited more volatility around trade news. It’s an approach similar to the single-stock trades outlined above, except it’s intended to profit from rebounds in full downtrodden sectors.
To that end, Goldman has selected the SPDR ETFs tracking the industrials, materials, semiconductor, and technology industries as the best fits for this strategy. Here’s a quick summary, with the four funds ranked in increasing order of one-month implied volatility:
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