Barron\'s - 16.09.2019

September 16, 2019 BARRON’S M7

The Striking Price

Options

Bank of America Is Worth a Bet

By Steven M. Sears

SAM ZELL WAS RECENTLY ON CNBC, LISTENING

totheusualpalaverabouteverythingthat

couldgopossiblygowrongintheworldat

anymoment.Finally,theblunt-talking,self-

made billionaire made an important point

about market pundits.

“Wepredictedthatit’sgoingtobethis,

and we’re worried about this, and we’re

worried about that, and meanwhile the

gamekeepsgoing,”saidZell,whomadehis

fortune in real estate.

Real money is often made when others

think there isn’t any opportunity and the

risks seem high. The saga ofBank of

America(ticker: BAC), which was almost

destroyedduringtheglobalfinancialcrisis,

illustrates the lesson well.

Inthepastdecade,thebank’sstockprice

hasdoubledandtripledandthensome.This

columnlongchampionedthestockduringits

darkest hours, and has never stopped. We

recommended buying the stock and using

upside call options to supercharge the ad-

vance since Bank of America, which closed

Friday at $30.17, was in the single digits.

(Callsincreaseinvaluewhentheassociated

securityrises.)Sincethen,CEOBrianMoy-

nihan has turned the bank into a power-

house,andWarrenBuffetthasbecomeBank

of America’s largest shareholder.

Amidtalkofacomingrecessionandex-

pectations that the Federal Reserve is

about to lower interest rates again—theo-

reticallycrimpingfinancialstocks—it’sim-

portanttorememberthatbuyingstuffthat

iswildlyoutoffavorishistoricallyagreat

way to make money.

True, BofA, like other financial stocks,

has recently popped higher, but it seems

unable to definitively stay above $30. And

now J.P. Morgan is telling its clients that

BofA’s stock should shine.

Shawn Quigg, a derivatives strategist,

predictsthatthestockcouldrallyonacom-

bination of progress on the trade war, an

accommodative Fed, a steepening yield

curve,orevenhedgefundsadjustingport-

folios, which could trigger a style rotation

intobatteredstocks,sparkingachainreac-

tion of short covering, fundamental flows,

andequitylong-shortportfoliorebalancing

by quantitative investors.

InvestorscouldconsiderbuyingBankof

America’sOctober$30callsthatexpireon

Oct.25andcost$1.14.Thetradepositions

investorsattheforefrontofpotentiallyfa-

vorable events and lets them take advan-

tage of cheap implied volatility.

Bank of America’s one-month at-the-

money options are priced without a greed

premium,eventhoughtheremightbealot

tobegreedyabout.Ifthetradeworks,and

thebankpopsto,say,$34byexpiration,the

call is worth $4. If the stock is below the

strike at expiration, the trade fails.

During the past 52 weeks, Bank of

America stock has ranged from $22.66 to

$31.37andisup0.1%.Sharesareup22.4%

this year, two percentage points ahead of

the S&P 500 index.

To be sure,the single most important

thing about Bank of America is arguably

that it is a well-run company with a CEO

whoknowshisbusinessbecauseherebuilt

itafterhispredecessornearlydestroyedit.

The stock’s 2.4% dividend yield is like a

cherry atop a sundae.

Atextbookcouldbewrittenaboutallof

the risk factors facing the financial sector,

butifinterestratesareloweredandmoney

flows into stocks, as predicted, just about

anythingshouldadvance,especiallystocks

withcompetitiveyields—eveniftheassoci-

ated company’s business is challenged by

the drag of lower rates. If Moynihan em-

bracesthemomentanddoesmoretoboost

thedividendandbuybackstock—reward-

ing everyone who stuck with him through

thenastydays—BofAwillpopevenhigher.

Soundintriguing?ConsiderfollowingJ.P.

Morgan’s call trade, or just buy the stock

andsellsomeputsthatexpireinsixmonths

withstrikepricesjustbelowthestockprice.

These days, investing is too often dis-

cussedlikeasportingmatchortogetpeo-

pletoclickonwebsitelinks.Regardlessof

whathappensintheshortterm,peoplewill

alwaysneedtoborrowandmanagemoney,

and the game will keep going.

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

15

20

25

30

35

40

O NDJ FMAM J J A S

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

55

90

125

160

195

230

265

O NDJ FMAM J J A S

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

7

8

9

10

11

12

13%

O NDJ FMAM J J A S

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11

12%

O NDJ FMAM J J A S

Source: Credit Suisse Equity Derivatives Strategy

Skew indicates whether the options market expects a stock-market advance or decline. It measures the difference

between the implied volatility of puts and calls that are 10% out of the money and expire in three months. Higher

readings are bearish.

Week'sMostActive

Company Symbol TotVol Calls Puts AvgTotVol IV%ile Ratio

National Vision EYE 23674 21018 2656 388 74 61.0

Invacare IVC 10389 7271 3118 244 88 42.6

Acadia Healthcare ACHC 16300 15995 305 988 55 16.5

Viavi Solutions VIAV 94101 91473 2628 6180 87 15.2

Park City PCYG 2532 1993 539 168 100 15.1

Rent-A-Center RCII 34948 33363 1585 2964 3 11.8

Avon Products AVP 22877 8814 14063 2208 4 10.4

Constellium CSTM 36707 36364 343 3592 9 10.2

The Lovesac LOVE 4588 2847 1741 488 76 9.4

Washington Prime WPG 13518 8629 4889 1524 96 8.9

Dave & Busters PLAY 40548 21288 19260 4608 26 8.8

Ally Financial ALLY 65567 59097 6470 8416 42 7.8

Immunogen IMGN 8886 8737 149 1148 40 7.7

Restoration Hardware RH 107196 61619 45577 16224 3 6.6

Ligand Pharm LGND 10238 1575 8663 1708 88 6.0

USA Technologies USAT 30769 24974 5795 5492 64 5.6

Acadia Pharm ACAD 27652 15598 12054 5120 48 5.4

Simon Property SPG 85960 8959 77001 16100 75 5.3

Agios Pharm AGIO 11554 1123 10431 2220 66 5.2

Moneygram MGI 17075 11414 5661 3388 81 5

Thistableofthemostactiveoptionsthisweek,ascomparedtoaverageweeklyactivity–notjustrawvolume.Theideaisthatthe

unusuallyheavytradingintheseoptionsmightbeapredictorofcorporateactivity–takeovers,earningssurprises,earningspre-

announcements,biotechFDAhearingsordrugtrialresultannouncements,andsoforth.Dividendarbitragehasbeeneliminated.In

short,thislistattemptstoidentifywhereheavyspeculationistakingplace. Theseoptionsarelikelytobeexpensiveincomparisonto

theirusualpricinglevels.Furthermore,manyofthesesituationsmayberumor-driven.Mostrumorsdonotprovetobetrue,soone

shouldbeawareoftheseincreasedrisksiftradinginthesenames

RatioistheTotVoldividedbyAvgTotVol.IV%ileishowexpensivetheoptionsareonascalefrom0to100.

Source:McMillanAnalysis