Barron\'s - 09.03.2020

March9,2020 BARRON’S M5

THE STRIKING PRICE

In the dark days of the credit crisis, the financial

world was seemingly ending. Yet some people set

themselves up to make fortunes.

In Times Like These,

Be Like Warren Buffett

W

hen fear defines financial

markets, remember Warren

Buffett. The great investor

once said the secret to beat-

ing the market was to be fearful when oth-

ers are greedy and greedy when others are

fearful.

It is a simple idea, but it’s hard to do,

especially now, when no one knows what

the coronavirus might do. Right now, it ex-

ists as a widespread yet not especially lethal

outbreak, though some—like Buffett’s

friend Bill Gates—fear it is a once-in-a-

century pathogen. President Donald Trump

insists that political opponents are using the

virus to destabilize his administration. And

the Federal Reserve lowered interest rates

by half a percentage point, driving the 10-

year Treasury yield to a historically low

level in order to blunt its impact.

It isn’t worth debating any of this be-

cause the stock market tells us everything

we need to know. The Dow Jones Industrial

Average dropped by 12% for the week

ended on Feb. 28, and the S&P 500 index

and the Nasdaq Composite each lost 11%. It

was the market’s worst week since 2008,

and the volatility this past week has also

been extraordinary.

That raises a key point. In the dark days

of the credit crisis, the financial world was

seemingly ending. Yet by March 2009, the

worst was over, and some people set them-

selves up to make fortunes because they

bought stocks during those dark days.

The great indicator that led them to buy

when everyone else was selling was often

their own discomfort. When the tape made

them feel that they wanted to vomit from

the stress, they bought stocks and sold

bearish put options to buy stocks even

lower. Others concluded that widespread

interest in hedging stocks during the

crisis—a sign of panic because it shows an

insensitivity to price—suggested that the

market would stop declining.

This isn’t meant to imply that the coro-

navirus will soon stop menacing the mar-

ket. No one knows what will happen to-

morrow. But if you invest today in a blue-

chip stock, values may fluctuate, but your

future investment will almost certainly be

worth more—provided the virus doesn’t

destroy the world.

Since the credit crisis, we have encour-

aged investors to practice “time arbitrage”

by taking advantage of current conflagra-

tions in anticipation of better tomorrows.

If you can buy and hold for a few years,

today’s problems probably won’t be so

severe.

To follow Buffett’sfear dictum, consider

the humble cash-secured put strategy,

which entails selling puts on quality stocks

while setting aside the purchase price of

the underlying stock in your brokerage

account. Find stocks you can own for a few

years or longer, and sell one- to three-

month puts with strike prices that are just

below the stock’s price.

Favor stocks likeAT&T(ticker: T), with

a dividend yield of about 6%, orVerizon

Communications(VZ), with a yield of

4.5%. If the virus worsens, people will still

speak on their mobile phones, surf the

internet, and watch TV.Netflix(NFLX),

the king of streaming content, should do

well, too.

The put strategy is simple. If the stock

advances rather than declines, you keep the

premium. If the stock is at the strike price

at expiration, you buy the stock. The real

risk is that the stock falls far below the

strike price, and investors must cover the

put at a higher price or buy the stock at the

strike price even if it is trading lower. The

strategy works for any stock you are will-

ing to own until brighter days return.

Our fear strategy is like disaster prep-

ping. Rather than hoarding water, ammuni-

tion, and canned goods, you are stockpiling

quality stocks that often pay attractive divi-

dends when many investors are fearful.

This isn’t for everyone, naturally, but those

who dare tend to win.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

20

30

40

50

AM J J A SO ND J FM

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

45

80

115

150

185

220

255

290

AM J J A SO ND J FM

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13

14

15%

AM J J A SO ND J FM

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11

12

13%

AM J J A SO ND J FM

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

Opko Health OPK 193309 191163 2146 5192 100 37.2

Forty Seven FTSV 15308 7115 8193 452 0 33.9

Genmark Diagnostics GNMK^6619643818126099 25.5

Cypress Semiconductor CY 9332 3414 5918 552 99 16.9

ABM Industries ABM 2223 714 1509 216 99 10.3

Ocular Therapeutics OCUL^17190159061284172496 10.0

Omeros Corp. OMER^16517112765241187661 8.8

Covetrus CVET 8323 6620 1703 948 93 8.8

Big Lots BIG 63574 55679 7895 8092 99 7.9

Barnes & Noble BNED^3403329710644495 7.7

Guidewire Software GWRE 11134 2780 8354 1748 91 6.4

Huntington Bancshares HBAN 34841 3911 30930 5740 100 6.1

Eldorado Resorts ERI^91335567723456316284100 5.6

5th 3rd Bank FITB 50804 23985 26819 10092 99 5.0

Quest Diagnostics DGX 11696 10423 1273 2384 100 4.9

Brunswick BC^4398580381892495 4.8

Brookdale Senior Living BKD 14195 2002 12193 2984 98 4.8

BioCryst Pharm BCRX 45598 44815 783 9516 98 4.8

Inoviio Pharm INO 270466 219589 50877 57516 100 4.7

United Natural Foods UNFI^11378204993292436100 4.7

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