September 9, 2019 BARRON’S M7
The Striking Price
Options
Getting Paid to Collect Yield
By Steven M. Sears
DESPITE THE POLITICAL TURMOIL OF THE
pastfewmonths,whichsometimesmadeit
seem that the post–Word War II order of
theworldisatrisk,theS&P500indexand
the Cboe Volatility Index, or VIX, remain
atreasonablelevels.Butit’shardtodismiss
thegrowingnumberofrespectedinvestors
whoareexpressingcautionaboutthelong-
running bull market.
Sam Zell, the billionaire real estate
tycoon, told CNBC on Wednesday that he
has more cash than ever before. Warren
Buffett, who seems to enjoy buying amid
chaos and fear as much as he likes value
investing,isholdingarecord$122billionin
cash at Berkshire Hathaway.
RayDaliorunsBridgewaterAssociates,
theworld’slargesthedgefund.Herecently
wrotethatthecurrentmarketremindshim
of the 1930s, citing central banks’ limited
abilitytostimulatetheirnations’economies,
large wealth and political polarity, and the
conflict between rising world power China
andexistingworldpowerAmerica.“If/when
thereisaneconomicdownturn,thatwillpro-
duceseriousproblemsinwaysthatareanal-
ogous to the ways that the confluence of
those three influences produced serious
problems in the late 1930s,” he argues.
The world’s two largest economies, the
U.S.andChina,arelockedinanescalating
trade war that is arguably as much about
globaldominationaseconomics.TheUnited
Kingdom is trying to leave the European
Union. Economic data in the U.S. and
abroad is increasingly downbeat.
Many nations have embraced negative
interest rates, so people can borrow money
at historically low rates. The Federal Re-
serve, the most world’s important central
bank, isunder attack by President Donald
Trump for not aggressively lowering rates.
Inmomentslikethis,theoptionsmarket
offersawindowintothemindsofsophisti-
catedinvestors.Here,largelyoutofsight,
they use puts and calls to express their
directionalviews.Increasingly,signalssug-
gest preparations for a market decline.
On Tuesday, for example, Susquehanna
Financial Group’s Chris Jacobson reported
big bearish trades in puts on the SPDR
S&P 500 exchange-traded fund (ticker:
SPY). Investors bought 25,000 September
$261 puts that expired on Friday, 70,000
September$265putsthatexpireonSept.9,
and50,000September$250putsthatexpire
on Sept. 11. Large positions in extremely
short-datedoptionsareunusualandindicate
high convictions about a decline.
Yet sentiment is still positive on other
assets.Jacobsonnotedinvestorsusingone
of our favorite strategies—selling puts on
assetstheywanttobuy—on Apple (AAPL)
Mattel (MAT), RealReal (REAL), Ana-
plan (PLAN), IllinoisToolWorks (ITW),
Barrick Gold (GOLD), Morgan Stanley
(MS), Adient (ADNT), Lyft (LYFT), the
VanEckVectorsOilServices ETF(OIH),
the Utilities Select Sector SPDR ETF
(XLU), and the S&P 500.
This column has recommended buying
goldandexchangestocks,sellingstockand
replacing the positions with upside calls,
and hedging portfolios. Recently, we have
often cited one of our favorite strategies:
selling puts on blue-chip stocks that pay
dividendstoenhancereturnsonidlecash.
Theoptionsmarketisalwayswillingto
pay investors for agreeing to buy stock,
and if the shares never decline below the
put strike price, investors can earn a few
percentage points on their cash, just for
selling the put.
Consider SouthernCo. ’s(SO)February
$60 puts. When the stock was around $60,
theycouldbesoldfor$2.92.Ifthestockis
abovetheputstrikeatexpiration—andutil-
ity stocks with high-dividend yields are in
demand—investorscankeepthepremium,
which represents a 5.1% return on cash.
Shouldthestockbebelow$60atexpira-
tion,investorsgetpaidtobuyastockwith
a4.14%dividendyield.Duringthepast52
weeks,ithasrangedfrom$42.50to$60.15.
Thekeyriskisthatthestockcouldfall
far below the strike price, but that seems
unlikelyinaworldincreasinglydefinedby
negative interest rates, which have made
investors hungry for yield.
Equity Options
CBOE VOLATILITY INDEX
VIX Close VIX Futures
10
15
20
25
30
35
40
O NDJ FMAM J J A S
Daily Values Source: CBOE
THE EQUITY-ONLY PUT-CALL RATIO
Put-Call Ratio S&P 500 Index
55
90
125
160
195
230
265
O NDJ FMAM J J A S
Source: McMillan Analysis Corp.
SPX SKEW
Implied volatility %
7
8
9
10
11
12
13%
O NDJ FMAM J J A S
Source: Credit Suisse Equity Derivatives Strategy
NDX SKEW
Implied volatility %
8
9
10
11
12%
O NDJ FMAM J J A S
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
The Michales Companies MIK 88371 78432 9939 1968 94 44.9
REV Group REVG 2608 386 2222 148 90 17.6
Spark Therapeutics ONCE 21891 13685 8206 1712 21 12.8
Abeona Therapeutics ABEO 7033 5169 1864 552 100 12.7
Ardelyx ARDX 6070 4661 1409 524 100 11.6
Verint Systems VRNT 9585 4887 4698 916 29 10.5
Ulta Beauty ULTA 300759 190464 110295 33216 62 9.1
Donaldson DCI 3317 2609 708 396 96 8.4
Everest Re RE 7647 1246 6401 1020 28 7.5
HealthEquity HQY 18235 12463 5772 2552 48 7.1
Eldorado Resorts ERI 42665 11044 31621 6080 72 7.0
Coupa Software COUP 56167 31841 24326 9240 18 6.1
TeleNAV Inc TNAV 4757 2500 2257 796 100 6.0
American Eagle AEO 78082 43230 34852 13780 54 5.7
Adverum Biotechnologies ADVM 34390 21269 13121 6672 97 5.2
Ambarella AMBA 57752 38414 19338 12348 20 4.7
G-III Apparel GIII 15728 6855 8873 3312 75 4.7
Guidewire Software GWRE 11554 3614 7940 2640 100 4.4
Copart CPRT 9617 6585 3032 2248 50 4.3
American Outdoor Brands AOBC 32082 24339 7743 7648 84 4.2
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