Barron's - USA (2020-10-12)

M6 BARRON’S October 12, 2020

THE STRIKING PRICE

Alibaba, given its broad scope, could act in the

role once occupied by fixed income when it was

an effective offsetto equity weakness.

Using Alibaba to Protect

Against U.S. Volatility

C

hina might be the best hedge for

U.S. stocks.

Key Chinese indexes and

stocks are outperforming their

U.S. counterparts, and investor sentiment

suggests that Asia might even emerge as an

economic haven, as America and Europe are

still struggling with the Covid-19 pandemic.

The Xtrackers Harvest CSI 300 China

A-Shares exchange-traded fund (ticker:

ASHR), a proxy for mainland China’s

stocks, is up 21% this year, compared with

8% for the S&P 500 index.

Shares of Alibaba Group Holding

(BABA), one of China’s most important com-

panies, are up 41% this year. Alibaba, given

its broad scope, might just help investors

insulate their portfolios at a time of unusual

duress in U.S. history—acting in the role

once occupied by fixed income when it was

an effective offset to equity weakness.

When President Donald Trump surpris-

ingly ended stimulus negotiations with a

Tuesday tweet, U.S. stocks sank. Many Chi-

nese stocks, notably Alibaba, held up.

Hedging U.S. portfolios with Chinese

stocks, particularly Alibaba, might seem

outlandish, but Susquehanna Investment

Group, a top options-trading firm that seeks

out noncorrelated U.S. equity investments,

has significant China exposure. The secre-

tive trading company owns a huge piece of

ByteDance, the parent company of TikTok,

that could be worth more than $15 billion.

The investment would probably dwarf any-

thing the firm’s partners have ever realized

in a long history of extraordinary success.

Alibaba will never protect a portfolio the

way traditional hedges, such as S&P 500

options, do, but Alibaba’s options premiums

and stock price aren’t as distorted ahead of

the bizarre U.S. presidential election. Cboe

Volatility Index, or VIX, trading volumes are

stunningly anemic during the oddest trading

year since the 2008-09 financial crisis, sug-

gesting that investors have little faith that

VIX derivatives will work as expected.

But adding China exposure, especially

Alibaba, to a portfolio offers hedging

through diversification.

Alibaba will hold its annual Singles Day

event on Nov. 11. For 24 hours, Alibaba will

host an online sale and celebration that

makes Amazon.com ’s (AMZN) Prime Day

seem like a Rotary Club luncheon. The com-

pany will probably report quarterly earnings

in early November.

In 2019, Singles Day sales totaled $38

billion, up from $31 billion in the previous

year. This year’s event will indicate how

much Asian consumers have recovered from

the coronavirus. Powerful sales results will

intrigue investors who are worried about the

sclerotic U.S. and European economies and

concerned about political mishandling of the

Covid-19 pandemic.

With Alibaba’s stock at $299.74, investors

can sell Alibaba’sNovember$300 put for

$17.50 and buy Alibaba’s November $305

call for $15.40. The trade generates a credit

of $2.10. If Alibaba’s stock is at $325 at expi-

ration, the call is worth $20. Should the

stock price be below the put strike price at

expiration, investors are obligated to buy the

stock at the strike price, or to cover the put

at a higher prices.

During the past 52 weeks, Alibaba’s stock

has ranged from $168.12 to $302.61. Shares

are up 73% over the past year.

Alibaba’s attraction extends beyond

hedging and diversification. The stock mon-

etizes the rise of Asia’s middle class, which

is one of the world’s greatest economic

trends. Alibaba’s scope is so broad that any-

one who buys the stock essentially gets the

Asian equivalent of a portfolio of companies

similar to eBay (EBAY), PayPal Holdings

(PYPL), Goldman Sachs Group (GS),

FedEx (FDX), United Parcel Service

(UPS), and the entertainment studios.

Reports indicate that China’s economy is

already recovering from the coronavirus.

Goldman has even advised clients that Asia

is well positioned compared with other ar-

eas because it has contained the virus. The

irony is unpleasantly rich.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

30

50

70

90

ND J FMAMJ J ASO

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

40

60

80

100

120

140

160

180

200

220

240

260

280

300

320

ND J FMAMJ J ASO

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

ND J FMAMJ J ASO

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

ND J FMAMJ J ASO

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

MyoKardia MYOK 37383 19877 17506 664 0 56.3

Alphatec ATEC 5318 4455 863 300 99 17.7

L. B. Foster FSTR^3304313916520886 15.9

Cytokinetics CYTK 39807 24006 15801 2648 92 15.0

NextEra Energy Partners NEP 11843 11309 534 796 89 14.9

BrainStorm Cell Therapeutics BCLI^345461981314733277290 12.5

Domino's Pizzo DPZ^15881482267765471308053 12.1

Corvus Pharmaceuticals CRVS 7499 4480 3019 648 85 11.6

Levi Strauss LEVI 105631 79462 26169 9804 62 10.8

Clean Energy ETF ICLN^422313981424173944100 10.7

3D Systems DDD 67874 58161 9713 6696 95 10.1

Orion Energy Systems OESX 10394 10181 213 1028 56 10.1

Ocular Therapeutix OCUL^90666197286990844 10.0

Cornerstone Building Brands CNR 13030 12763 267 1356 78 9.6

Regeneron Pharmaceuticals REGN 49331 43069 6262 5144 86 9.6

Adient PLC ADNT^20852143606492228075 9.1

RPM International RPM 7889 6778 1111 888 83 8.9

Livient LTHM 62412 56836 5576 7084 89 8.8

ReneSola SOL 11703 10122 1581 1324 88 8.8

Jinko Solar JKS^15275966393863661800098 8.5

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

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