Barron\'s - 09.09.2019

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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

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