The market rally found its footing once again after Nvidia ‘s earnings report this week, but investors may still want to prepare for a reversal, according to Goldman Sachs. John Marshall of Goldman’s derivatives research team said in a Feb. 22 note that investors can use options to position for a reversal in the momentum trade. Momentum is an investing factor that is a way to bet that hot stocks will keep rising. Goldman’s approach to hedging momentum is two-pronged: buying put options on high momentum stocks, and buying call options on “anti-momentum” stocks. Puts and calls are contracts that give the holder the right to sell or buy, respectively, the underlying stock at a pre-determined strike price. Puts serve as a bet that a stock will fall, while calls are an upside play. If the stocks move unfavorably, the options expire and traders lose the premium paid for the contract. “If a true momentum reversal were to occur, we see the potential to profit on both sides of the trade,” Marshall wrote. To identify potential put option candidates, Goldman found stocks that have outperformed the broader market over the past year, are trading above their price target from Goldman analysts, and have a sell or neutral rating from those analysts. Two notable names are regional airline SkyWest and defense tech company Palantir . Both stocks have been strong in February, rising more than 13% and nearly 43% respectively. PLTR 1M mountain Palantir’s stock has surged in February. Goldman has a sell rating on SkyWest and a neutral rating on Palantir. On the other leg of the trade, Goldman identified stocks with buy ratings from its analysts that have fallen over the past 12 months. Two of the bigger stocks on the list are pharmaceutical giant Pfizer and agriculture chemical maker Mosaic . Both of those stocks are down more than 30% year over the past year.
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