Barron's - USA (2020-10-26)

October 26, 2020 BARRON’S M5

THE STRIKING PRICE

The key is focusing on the companies that

stand to benefit from a vaccine and findinga

reasonably cost-effective wayto invest.

Preparing for a Vaccine

With Call Options

T

he gods must have an evil sense

of humor.

Covid-19 has forced tens of

millions of people to spend more

time than ever before at home—often glued

to TVs or computer screens—and everyone

is under a nearly constant assault of nasty

political ads.

The content is so grating and outrageous

that PsyOps warriors could stream the ads

to psychologically weaken enemy combat-

ants, instead of blaring the sounds of hyster-

ically crying babies at them. By Nov. 3, the

nastiness may end—or begin anew—when

the world learns whether Donald Trump

will remain president or if Joe Biden, his

Democratic challenger, will succeed him.

Many polls predict that Biden will win,

and some suggest that Trump’s loss will be

profound. It’s dangerous to be overconfi-

dent, though much of Wall Street now is.

When Trump last ran, Hillary Clinton was

expected to trounce him—and the Street

was wrong in a “Dewey Beats Truman”

kind of way.

It’s time to start looking past the politi-

cal theater to what happens next. Eventu-

ally, Covid-19 will be controlled by a vac-

cine. When that happens, restaurants will

once more flourish, people will travel, and

the financial and commercial real estate

sectors will probably normalize.

Without a doubt, wagering on vaccines,

like much of pharmaceutical-sector invest-

ing, is hard for anyone without specialized

scientific knowledge. The key to covering the

knowledge gap is focusing on the companies

that would benefit from a vaccine and find-

ing a reasonably cost-effective way to invest.

John Marshall, a Goldman Sachs deriva-

tives strategist, recently advised clients to

consider 35 stocks that would benefit when

the economy fully reopens. The stocks have

trailed the S&P 500 index by about 10%

over the past month and about 48% this

year. “The reopening trade does not appear

crowded,” Marshall wrote in a recent note.

Goldman’s “Positive Reopening Reactors”

includeAmerican Airlines Group(ticker:

AAL),Alaska Air Group(ALK),Delta Air

Lines(DAL),SL Green Realty(SLG),

United Airlines Holdings(UAL),Simon

Property Group(SPG),Boeing(BA),Zi-

ons Bancorp(ZION),Host Hotels & Re-

sorts(HST),Kohl's(KSS),Kimco Realty

(KIM),PVH(PVH),Wells Fargo(WFC),

andHuntington Bancshares(HBAN).

Others includeNorwegian Cruise Line

Holdings(NCLH),Textron(TXT),Loews

(L),Boston Properties(BXP),Carnival

(CCL),Federal Realty Investment Trust

(FRT),U.S. Bancorp(USB),Nordstrom

(JWN),Prudential(PRU),UDR(UDR),

Marriott International(MAR),Royal

Caribbean Group(RCL),Ralph Lauren

(RL),Vornado Realty Trust(VNO),

Southwest Airlines(LUV),CBRE Group

(CBRE),Regency Centers(REG),Equity

Residential(EQR),Raytheon Technolo-

gies(RTX),Essex Property Trust(ESS),

andGeneral Electric(GE).

Goldman told clients to buy bullish call

options on the stocks, an approach that costs

less than buying equities. (Calls give the

holder the right to buy a security at a set

price and time.) Timing is key, so look for

stocks that are intriguing, choose one-month

expirations, and pick strike prices that are

5% to 10% above the stock price. The aver-

age 10% out-of-the-money call on the group

costs about 2.9% of the stock price.

Using calls as stock surrogates is risky.

Buying call options on stocks that don’t

advance, or that decline, often generates

losses. Once a call is bought, be prepared

to sell it once it nears expiration and to

“roll” into the next month, ideally by buy-

ing another call that costs less or the same

amount. Sometimes, more money is needed

to adjust the trade.

This style of investing isn’t for everyone.

It’s hard to identify compelling themes, and

to cost-effectively control investments,

while waiting for the upside to emerge.

Those who can, however, often find them-

selves on the right side of events.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

30

50

70

90

110

130

150

170

190

210

230

250

270

290

310

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

Uxin UXIN 23349 21291 2058 508 89 46.0

Netgear NTGR 30323 15187 15136 896 73 33.8

Sunnova Energy NOVA^18451292315528191284 9.7

IRobot IRBT 90589 33278 57311 10568 58 8.6

Endurance Int'l EIGI 6155 5802 353 796 70 7.7

Logitech LOGI^679084331224596919674 7.4

Winnebago WGO^24552205484004331674 7.4

Halozyme Therapeutics HALO 8425 7615 810 1160 58 7.3

UBS UBS 12549 7276 5273 1736 49 7.2

Outfront Media OUT^1467614373303270876 5.4

Pitney Bowes PBI 29331 27376 1955 5520 76 5.3

Align Technology ALGN 22489 12216 10273 4356 74 5.2

Snap SNAP 2390011 1483180^90683152172860 4.6

Village Farms Int'l VFF 31949 31148 801 6980 80 4.6

CoreCivic CXW 32565 26494 6071 7792 99 4.2

Teradyne TER^307821950011282734067 4.2

Nokia NOK 324191 295214 28977 78144 86 4.1

Parsley Energy PE 31222 15205 16017 7932 68 3.9

Adapimmune ADAP 5970 4893 1077 1552 97 3.8

Hilton Grand Vacation HGV^1221891933025324472 3.8

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