Barron\'s - 09.09.2019

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