February 22, 2021 BARRON’S M5
THE STRIKING PRICE
The next opportunity could be to position for
emerging, controversial themes—such as the rise
of inflation—that could shape the market narrative.
An Options Move to Profit
From Rising Inflation
O
ne of the greatest satisfactions
of investing is finding a stock
that is overlooked, undervalued,
and about to take off.
Yet it is increasingly difficult to find any
stock that hasn’t already turned higher,
buoyed by the allure of another massive
government stimulus package and a belief
among investors that there is little risk to
owning stocks when Uncle Sam is willing
to spend trillions to support the economy.
Instead, the next opportunity could be
to position for emerging, controversial
themes—such as the rise of inflation—that
could shape the market narrative. Already,
inflation has become a feared consequence
of the $1.9 trillion stimulus package that
President Joe Biden favors to help the econ-
omy recover from the Covid-19 pandemic.
On Tuesday, the 10-year Treasury note
yield increased to about 1.30%, and huge
swaths of the stock market buckled lower, as
investors worried that the increase in bond
yields was foreshadowing rising inflation.
The yield was 1.34% at Friday’s close.
Bond yields are influenced by changing
economic conditions. When the yield curve
changes—as it is now, with yields on bonds
that expire in two years or less anchored
near zero, and yields on bonds that expire
from 10 to 30 years rising—investors view
the move as the bond market telegraphing
inflationary expectations.
While many stocks have weakened in
response, the financial sector did not, and
that is likely to remain true for as long as
the yield curve steepens. As long-term
nominal rates rise and short-term nominal
rates remain low, banks borrow short-term
money and use it to make long-term loans.
To profit from inflationary expectations
in the bond market, consider trading op-
tions on theSPDR S&P Regional Bank-
ingexchange-traded fund (ticker: KRE).
The ETF offers exposure to banks with
revenue and earnings that are arguably less
influenced by the vagaries of institutional
trading and more exposed to loans, such as
SVB Financial(SIVB),Regions Financial
(RF),KeyCorp(KEY),First Republic
Bank(FRC),Fifth Third Bancorp(FITB),
Truist Financial(TFC),M&T Bank
(MTB), andPNC Financial Services
Group(PNC). Moreover, these smaller
banks often have a better read on local econ-
omies and businesses than national banks,
which could help them make better loans.
“The Federal Reserve has told us that
they are not raising rates until they see the
whites of inflation’s eyes, and this should
benefit banks, especially regional banks,”
Steve Sosnick, Interactive Brokers’ chief
strategist, toldBarron’s.
With the SPDR S&P Regional Banking
ETF at $63.81, investors who want expo-
sure to regional banks and the inflation
theme could sell the June $61 put option
for about $4.40 and buy the June $65 call
option for about $4.30. The risk-reversal
strategy—that is, selling the put and buying
a call with a higher strike price—is a high-
conviction trade predicated on a belief in
the continued vigor of the banking sector
and the stickiness of higher bond yields.
The strategy uses June options to capture
the April and June meetings of the Fed’s
rate-setting committee. It’s impossible to
know what might be said after the meetings
conclude, but it is hard to imagine that the
Fed will issue statements that upset the cur-
rent thinking on yields, rates, and inflation.
If the ETF is at $75 at expiration, the call
would be worth $10. If it is below $61 at ex-
piration, investors should just buy the fund,
rather than cover the put or adjust the posi-
tion, and use it as exposure to inflation and
rising yields. The timing of these big macro
themes is always tricky, but the inflation
theme is likely to persist all the same.
During the past 52 weeks, the ETF has
ranged from $27.26 to $63.91. It is up 23% so
far this year, far outstripping the S&P 500
index’s 4% gain. The strategy expresses a
view that the outperformance will persist,
and a willingness to own the fund at a lower
price should it dip.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 RatioGrupo Supervielle SUPV 27931 27003 928 216 100 129.3
Maiden MHLD 18571 18374 197 572 96 32.5
Primo Water PRMW^4779446945849149285 32.0
Xinyuan Real Estate XIN 20127 17724 2403 648 99 31.1
NRG Energy NRG 90262 18246 72016 3896 96 23.2
ION Geophysical IO^621954940912786289298 21.5
Ebang Int'l EBON^460074404605554692304465 20.0
Jack In The Box JACK 12980 8499 4481 1092 54 11.9
Hepion Pharmaceuticals HEPA 35284 32264 3020 3336 100 10.6
La-Z-Boy LZB^82535534271986047 9.6
Denison Mindes DNN 1148863 1068637 80226 121144 100 9.5
FinVolution FINV 23204 20680 2524 2464 100 9.4
KAR Auction Services KAR^13052110092043143674 9.1
ZW Data Action Technologies CNET 75963 68995 6968 8624 87 8.8
Survey Monkey SVMK 20766 13914 6852 2420 39 8.6
Teekay Tankers TNK^38910367892121459265 8.5
Bluebird Bio BLUE 29899 20616 9283 3600 97 8.3
Johnson Controls JCI 47220 43444 3776 5868 65 8.0
CarGurus CARG 42403 37061 5342 5480 74 7.7
SOS Ltd SOS^109099693008916090714092491 7.7
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