Barron\'s - 05.08.2019

August 5, 2019 BARRON’S M7

The Striking Price

Options

It’s Time to Bet on Tech Stocks

By Steven M. Sears

INSTITUTIONAL INVESTORS PRETTY MUCH OWN

allofthesamestocks,yetanotherbankre-

centlynoted.Arealistmightconcludethat

such investors operate expensive index

funds that all buy the same things and

chargehighmanagementfeesfordoingso.

Ifyouwanttogiveyourmoneytothese

guys, go ahead. But that’s probably as ap-

pealing to you as buying stocks that are

dancing around highs.

Manyinvestorsareworriedaboutlofty

valuations and economic uncertainty, and

that has helped create the proverbial wall

ofworrythatdefinesabullmarket.Those

concerns have plumped the premiums of

manydownsideputoptions,whichnervous

investors buy to hedge their equity posi-

tions.(Putsincreaseinvaluewhentheun-

derlying security’s price declines.)

Thatcreatesopportunitiesforinvestors

willing to sell puts.

In a time of heightened nervousness,

downsideputsalmostalwaystradeatafear

premium.Thisiswidelyknownamongmar-

ketinsiders,whooftenrefertosellingputs

on blue-chip stocks—allowing the seller to

pocket a premium if the underlying stock

rises in value, but also committing him or

hertobuythesharesiftheirpricefalls—as

one of the truly great strategies.

Consider Microsoft (ticker: MSFT),

one of the crowded stocks. It’s up 33% this

year, about double the return of the S&P

500 index. The companyrecentlyreported

good earnings, aided by the success of its

Azure cloud-computing business and soft-

ware subscription sales, and its shares

have been hovering around their 52-week

high. During the past year, their price has

ranged from $93.96 to $141.68. Several an-

alysts have targets of $155 to $160.

When Microsoft was around $136, the

October $130 put could be sold for $2.45.

Thispositionsinvestorstobuythestockat

an effective price of $127.55. Should the

stockbeabovethestrikeatexpiration,in-

vestors pocket the put premium. The key

riskisthatthestockcouldplummetfarbe-

low the put strike, obligating the options’

sellerstobuybacktheputformoremoney

than they received for the sale or to buy

the stock for the put strike price, even if

the stock price is lower.

Theapproachworksforanysharesthat

you’dbewillingtobuyatlowerprices,but

isparticularlyappealingfortradingstocks

of major tech companies that now are al-

mostcertainlybeinginvestigatedforanti-

trustviolationsbytheJusticeDepartment.

The probe follows a letter sent to the

Federal Trade Commission by the Retail

IndustryLeadersAssociation,orRILA,in

lateJune.Thetradegrouprepresentsmore

than 200 retailers, including Walmart

(WMT) and Target (TGT).

The association wasn’t complaining

aboutcompetitionfrom Facebook (FB), Al-

phabet (GOOGL), Amazon.com (AMZN),

Visa (V), or any other tech or payments

platform,wroteBrianDodge,RILA’schief

operatingofficer.Instead,hecontended, his

members want a level playing field. He

charges that tech companies influence

prices and even determine what shoppers

see when they are ready to buy.

In the past, we’ve recommended selling

puts on Facebook and buying its stock, an-

ticipatingthatthegovernmentmighttryto

breakupthesocial-mediagiant.Thenewin-

vestigation—even though the DOJ didn’t

name any companies—validates the recom-

mendation. It should solidify the fear pre-

mium in Facebook puts.

Thepressureonbig,crowdedtechstocks

is likely to increase, and that’s good for in-

vestors. Fear is one of the few real friends

anyone has in the financial markets. And

selling puts—especially on dividend stocks

thatareindemandfortheiryields—remains

oneofthebestwaysthatwell-heeledinves-

tors,whocanwarehousequalitystocks,can

take advantage of the market mob.

The higher stock prices go, the edgier

investors will become. Should a great

shakeoutoccur,manyputpriceswillfurther

inflate, with even richer fear premiums,

creating even greater opportunities.

email: [email protected]

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

15

20

25

30

35

40

SO NDJ FMAM J J A

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

50

80

110

140

170

200

230

260

SO NDJ FMAM J J A

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

7

8

9

10

11

12

13%

SO NDJ FMAM J J A

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11%

SO NDJ FMAM J J A

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

Ferro FOE 6252 5766 486 256 84 24.4

Harsco HSC 17992 137 17855 864 9 20.8

2U TWOU 35360 22540 12820 1724 100 20.5

Now DNOW 7010 5915 1095 512 91 13.7

SS&C Technologies SSNC 33377 17504 15873 2552 76 13.1

Trex Company TREX 16138 12402 3736 1232 44 13.1

Smith & Nephew SNN 6881 6783 98 540 22 12.7

Lexicon Pharm LXRX 10410 9227 1183 992 99 10.5

Medpace Holdings MEDP 8280 3605 4675 836 13 9.9

Unisys UIS 15035 13611 1424 1836 12 8.2

Delphi Technologies DLPH 26435 14036 12399 3300 81 8.0

Antero Midstream AM 28526 17552 10974 3592 98 7.9

STAAR Surgical STAA 31609 20897 10712 4108 60 7.7

Concho Resources CXO 85494 33842 51652 11828 95 7.2

Gannett GCI 16644 15797 847 2304 52 7.2

Post Holdings POST 5892 1485 4407 848 88 6.9

Waters WAT 10330 2843 7487 1544 57 6.7

Gartner IT 9320 6213 3107 1444 75 6.5

Beryl Drugs BERY 31619 18012 13607 4968 69 6.4

CyrusOne CONE 38296 36619 1677 5948 77 6.4

Thistableofthemostactiveoptionsthisweek,ascomparedto average weeklyactivity–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