Earnings season brings opportunities for investors across all sectors and products, but for one investment bank a single strategy is paying big returns — call options.

Goldman Sachs Group Inc. (GS) recommendation of buying call options has been a lucrative one for investors this reporting season.

On March 6, Goldman Sachs' derivatives strategists said in a note: “Call buying in this environment offers strong risk-reward and allows investors to gain upside exposure while limiting risk." If you had used this strategy heading into this earnings season the rewards would have been highly profitable. Returns from buying call options of the first 13% of companies in the S&P 500 to report amounted to returns over 100%, Goldman Sachs' noted.

A call option requires the investor to pay a premium for the right – not the obligation – to buy a stock on a certain date at an agreed upon price. The price is known as the strike price. 

For example, if an investor bought a call option in McDonald's Corp. (MCD) for a premium of $5 and a strike price of $120 that expired the day after its earnings report, the investor would exercise this option, if McDonald's share price was above $120. They would have made a net profit if the exercise price was above $125 (taking into account the $5 premium).

One advantage of a call option is your downside loss is limited to the premium you pay, unlike when buying the stock outright.

This earnings season, which began shortly after the end of the first quarter has been a good one for investors across the board. Since the end of Q1, all major U.S. indices are higher – led by the banking sector, which all reported in the early part of earnings season. Citigroup Inc. (C), Bank of America Corp. (BAC), Morgan Stanley (MS) and Goldman Sachs are all higher by 5% or more since reporting.

The Bottom Line

While the call option strategy has been a profitable one for investors, it has also benefited from overall market performance. Particular sectors, like financials have dragged the majority of stock prices higher since the end of Q1. For investors who like to limit their downside loss a call option is a good way to express a view on a particular stock. (For more, see: Three Ways to Profit Using Call Options.)