February 8, 2021 BARRON’S M5
THE STRIKING PRICE
Some Reddit traders apparently had multimillion-
dollar positions in GameStop calls that they never
realized.They waited too longto cash them in.
How to Use Options
To Juice Your Portfolio
I
t would be all too easy to cluck our
tongues overGameStop’s wild ride
up and down the past two weeks—and
to snicker over Reddit’s WallStreetBets
traders. It’s much better to lay out some
rules for self-directed investors to help
them be better stock and options investors.
Our previous primer—“New to Options
Trading? Here’s How Not to Make a Fool of
Yourself” (Sept. 17, 2020)—was based on
using options to better control stocks. That
remains our recommended approach. But
we recognize that many people use options
to engage in relatively low-cost, aggressive
momentum trading. Hedge funds do it every
day, and now John and Jane Investor have
joined the party.
Options volumes are at all-time highs.
About 44 million contracts trade on any
given day. The market has never before been
this active. Investors are buying loads of call
options, which we anticipated last year, but
not at this feverish level.
Here are some simple trading rules for
small investors and anyone else trying to
harness market momentum.
- Many institutional investors view
leverage, and margin, as an expression of
conviction in an investment thesis. When
passionate about an idea, many “lever up”
with options—adding to their stock posi-
tions by buying upside calls and trading
with borrowed money in margin accounts.
When you trade on margin, you generally
must maintain 50% of the securities value in
the account, though rates and requirements
vary by broker. If you violate margin rules,
brokers will shut down the position. Keep
dry powder at all times to cover the trades,
or be prepared to take profits at various
price points to manage margins.
- Some Reddit traders apparently had
huge, multimillion-dollar positions in
GameStop (ticker: GME) calls that they
never realized because they waited too
long to cash them in. Don’t be the idiot—
and there are many members of this club
among institutional and ultrahigh-net-
worth investors—who rides up stocks and
options to massive unrealized gains, only
to see them vanish. A 100% return is rare.
Take it when you can get it. If you let
money ride, make a return on your initial
investment and try to play with house
money. Paper profits aren’t real.
- If you think your aggressive trades can
appreciate more than 100%, consider “call
ladders.” If the stock is at $10, and you think
it will go to $50, spread your position among
different strike prices and expirations. This
creates opportunities to secure profits with-
out exiting the entire position. One of the
striking takeaways from the Reddit saga is
how much money some of the traders had
in two different strikes.
- Watch where you trade. When you trade
in any options contract, check open interest
levels for the various strikes and expira-
tions. Make sure you aren’t entering a thinly
traded roach motel that’s easy to enter and
hard to exit. Market makers will do every-
thing they can to gain an advantage over
you. Be smart. Liquidity is key. Spread your
trades out among expirations and strikes.
Let some ride. Take some profits.
- Remember, bulls make money, bears
make money, but pigs get slaughtered.
These rules aren’t an endorsement of
aggressive trading, but a recognition that
many people are always trying to make
a fast buck. A better approach is to buy
quality stocks that pay dividends and
curate the positions with put and call sales.
That so many momentum traders have
congregated on Reddit—and traded through
Robinhood—is telling. It’s a fact on Wall
Street that money is like water, and it tends
to pool at the lowest level. That now appears
to be Robinhood, which offers free trading
that’s easy to do on a cellphone.
Robinhood took a lot of heat for tempo-
rarily suspending trading in GameStop and
other hot stocks. Whatever its strengths and
weaknesses, more power to any Reddit trad-
ers who improved their financial positions
and paid off mortgages and college loans.B
By Steven M. Sears
Equity Options
CBOE VOLATILITY INDEX
VIX Close VIX Futures1030507090MAMJ J ASOND JF
Daily Values Source: CBOETHE EQUITY-ONLY PUT-CALL RATIO
Put-Call Ratio S&P 500 Index305580105130155180205230255280305330MAMJ J ASOND JF
Source: McMillan Analysis Corp.SPX SKEW
Implied volatility %8910111213141516%MAMJ J ASOND JF
Source: Credit Suisse Equity Derivatives StrategyNDX SKEW
Implied volatility %78910111213141516%MAMJ J ASOND JF
Source: Credit Suisse Equity Derivatives StrategySkew 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 RatioPar Pacific PARR 6598 6582 16 80 76 82.5
Corepoint Lodging CPLG 8141 8119 22 100 59 81.4
Ocean Power Technologoes OPTT^1326811791147719295 69.1
Concert Pharmaceuticals CNCE 3767 2888 879 60 98 62.8
Immunovant IMVT 4888 4225 663 104 94 47.0
Comstock Mining LODE^836026689816704207294 40.3
Fusion Acquisition FUSE^96468004164231646 30.5
Cyclerion Therapeutics CYCN 3996 3542 454 184 97 21.7
Anavex Life Sciences AVXL 63313 42803 20510 3316 100 19.1
BGC Partners BGCP^63334599473387369290 17.2
Zynerba Pharmaceuticals ZYNE 42172 39939 2233 2452 98 17.2
SELLAS Life Science SLS 31823 25070 6753 1892 98 16.8
DAVIDs TEA DTEA^22670183154355184891 12.3
Dynavax Technologoes DVAX 177106 159078 18028 15368 79 11.5
TETRA Technologies TTI 20771 20173 598 1800 93 11.5
Agenus AGEN^70102653944708639698 11.0
Applied Genetic Tech AGTC 14279 14171 108 1296 93 11.0
Surgalign SRGA 8584 8024 560 920 94 9.3
Solar Capital ZSL 11022 7905 3117 1272 87 8.7
Cassava Sciences SAVA^176140853559078523140100 7.6
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