Barron's - USA (2021-11-22)

November 22, 2021 BARRON’S 39

THE STRIKING PRICE

It’s impossible to know whether Rivian Auto-

motive will trade likean unhinged meme stock,

or if the shares and options will fall back to earth.

Only the Brave Should

Play Rivian Options

W

e noted last week that stocks

were so robust that it can

now be said that pigs—once

said to get slaughtered—make

more money than bulls or bears.

By Tuesday, as if to test our new axiom,

the options exchanges listedRivian Auto-

motive(ticker: RIVN), one of the world’s

hottest stocks. It’s now possible to use just

a little money to wager on a company that

could be to electric trucks whatTesla

(TSLA) is to electric cars.

Rivian’s R1S sport-utility vehicle and R1T

pickup are a sight to behold. Its commercial

vans, which are optimized for delivery and

logistics, have attracted an early order from

Amazon.com(AMZN). Early investors

includedFord Motor(F),T. Rowe Price

Group(TROW), and Amazon.

Rivian’s future seems extraordinarily

intriguing, and thus the fear and greed pre-

miums baked into each of its put and call

options are extraordinarily high.

Rivian’s implied volatility level—

essentially the options market’s educated

guessathowlikelythestockistomove,up

or down—is about 130%. The S&P 500 in-

dex, in comparison, has an implied volatility

of 17%. High volatility signals a strong like-

lihood of significant stock swings.

That suggests that Rivian’s just-listed

options may prove to be even hotter, and

more active, than the stock.

With just a little money, investors can try

to profit from Rivian’s stock movement. An

options contract covers 100 shares, but puts

and calls cost a fraction of the price of the

shares. The returns on an options contract

can be stunning.

For anyone who has a big enough risk

budget—meaning you can afford to lose

the money and it will not affect your life—

Rivian’s options could be a gift from the

market gods. Aggressive investors can

consider a strategy we have often recom-

mended for Tesla: the risk reversal.

By selling a put and buying a call with a

higher strike price, but with the same expi-

ration, investors can get the options market

to pay for all, or some, of a stock’s potential

advance. In return, you must be willing to

buy the stock if it declines.

With Rivian’s stock at $128.60, aggressive

investors can sell Rivian’s December $125

put for about $15 and buy the $135 call for

about $14. If Rivian is at $200 by expira-

tion—and why not?—the call is worth $65.

If the stock runs out of juice and de-

clines, be prepared to buy it. If the stock is

at $100—and why not?—investors would

be obligated to buy it at $125 or adjust the

put to avoid assignment.

In Rivian’s brief existence, its shares have

ranged from $95.20 to $179.47. They doubled

since the company went public on Nov. 10 at

$78—and closed on Friday 28% below their

peak. It’s impossible to know whether Riv-

ian will trade like an unhinged meme stock

propelled by greedy investors, or if the

shares and options will fall back to earth.

The company has never sold a truck. It

has no revenue. Anyone who preordered a

truck could buy into the initial public offer-

ing—even though they could cancel their

orders. Yet the IPO is in an elite class. In the

past five years, just seven other billion-dollar

IPOs have advanced for five straight days.

Rivian is an example of the extraordi-

nary excesses that have come to define the

options market, as stocks continue to trade

at all-time highs. It is also everything that is

great about America.

Robert J. Scaringe, the company’s

founder, worked on cars as a little boy in

his neighbor’s garage. His boyhood room

was littered with parts. He has followed his

passion and become an entrepreneur who

has captivated the world with his vision.

The options market is saying that the

excitement is far from over.B

Steven M. Sears is the president and chief oper-

ating officer of Options Solutions, a specialized

asset-management firm. Neither he nor the firm

has a position in the options or underlying securi-

ties mentioned in this column.

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

15

20

25

30

35

40

DJFMAMJJASON

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

30

55

80

105

130

DJFMAMJJASON

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

9

10

11

12

13

14

15

16%

DJFMAMJ JASON

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

7

8

9

10

11

12

13%

DJFMAMJJASON

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

Dicerna DRNA 19240 3527 15713 224 56 85.9

Pine Island Acquisition PIPP 80693 73037 7656 1512 98 53.4

Destination XL DXLG^100048190181426093 38.5

Olema Pharmaceuticals OLMA 7207 6287 920 232 100 31.1

SIGA Technologies SIGA 15341 15050 291 532 88 28.8

BM Technologies BMTX^67046655971449253296 26.5

Kezar Life Sciences KZR^342271762316604135261 25.3

La-Z-Boy LZB 10113 5016 5097 416 6 24.3

ClearSign Technologies CLIR 7627 7284 343 336 99 22.7

Talkspace TALK^19275168412434964100 20.0

EVO Payments EVOP 2872 2704 168 148 89 19.4

Dolby Laboratories DLB 6260 3493 2767 436 1 14.4

Varex Imaging VREX^3749957279226432 14.2

OneConnect Financial Tech OCFT 10406 3801 6605 808 100 12.9

Telos TLS 11130 9109 2021 892 46 12.5

EyePoint Pharmaceuticals EYPT^321312006512066259228 12.4

Second Sight Medical Products EYES 15068 12938 2130 1284 75 11.7

Canoo GOEV 334681 291433 43248 28976 72 11.6

On Holding ONON 75458 59343 16115 6808 100 11.1

MagnaChip Semiconductor MX^29485206998786307696 9.6

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