Barron’s - USA (2020-09-28)

September 28, 2020 BARRON’S M5

THE STRIKING PRICE

Rising anxiety makes it more attractive to sell

cash-secured puts to nervous investors who will

likely pay top dollar to hedge their portfolios.

Fear Election Chaos? Try

Some Cash-Secured Puts.

I

t’s a rare moment in U.S. history, with

financial markets expecting the

months after a presidential election to

be dangerously erratic.

The Cboe Volatility Index’s futures mar-

ket indicates that investors are preparing

for tumultuous financial and political con-

ditions inNovember,December, and Janu-

ary. Until recently, investors had priced

October as a month of great volatility, and

the following months as less.

But concerns raised by President Don-

ald Trump about potential problems with

mail-in ballots are apparently persuading

major investors to prepare for postelection

chaos. They are buying VIX futures and

options that would increase in value if the

stock market declined, actions that have

lifted the VIX futures curve and sent bear-

ish tremors rippling into the stock and

options markets.

“Investors are pricing in the chance that

the election will be messy and contested,

the results potentially delayed, and the out-

come unacceptable to a large portion of the

country,” says Steve Sosnick, Interactive

Broker’s chief strategist.

The warning signs in the VIX deriva-

tives complex began emerging about a week

ago, and they now loom above the stock

market like the sword of Damocles.

If Trump or his challenger, former Vice

President Joe Biden, contests the election,

stock prices would likely decline and the

world would be thrust into a predicament.

Since America was founded, power has,

with the exception of the Civil War, nearly

always passed peacefully from one party to

the other. Our generally stable ways have

long set the standard for best political prac-

tices around the world. The 2020 election

could be an exception.

Already, signs suggest that Americans

are ready for almost anything. A backlash

against police brutality has incited protests

and riots in major cities. People are buying

guns to protect themselves amid calls to

defund the police. Incredibly, the Trump

administration has declared New York City,

Seattle, and Portland, Ore., to be “anarchist

jurisdictions.” Meanwhile, the pandemic

rages—and the list of woes could grow.

And yet, it’s worth remembering that

even though the path ahead may prove vol-

atile, corporate earnings will increase over

time, stocks will follow, and derivatives

volatility will revert to the mean. “Uncer-

tainty will abate,” says Doug Kramer, Neu-

berger Berman’s co-head of quantitative and

multi-asset class investments. Kramer’s

observation is a worthy motto for investors

at a time when the fabric of America ap-

pears to be fraying, even tearing.

In early September, when the S&P 500

was about 8% higher and no one was inter-

ested in election hedging, we recommended

buying S&P 500 puts. Now, an evolution is

warranted. Rising anxiety arguably makes

it more attractive to sell cash-secured puts

to nervous investors. By doing so, investors

can potentially profit by selling hedges to

investors who will likely pay top dollar.

When the market again plummets so

sharply that the end seems nigh, consider

selling cash-secured puts that are 5% to

10% below the price of your favorite securi-

ties, and that expire in 30 to 45 days.

The strategy was popular earlier in the

week in Apple (ticker: AAPL) shares and

across the tech sector as stock prices fell.

Chris Murphy, a Susquehanna Financial

Group strategist, told clients that even if

they “missed” the tech rise in August,

they’ll get another chance now that prices

are back at pre-August levels and implied

volatility is higher. Those conditions are

attractive for put sales on stocks that inves-

tors are willing to buy on a dip.

Until the appointed hour, the political

commentariat will keep palavering about

chaos, the rise of socialism, and the death

of America. Financial pundits will weave

that nonsense into a doom-and-gloom song.

Meanwhile, tough, well-heeled investors

will sell puts on blue-chip stocks they can

hold until peace once more prevails.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

30

50

70

90

ONDJFMAMJ JAS

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

45

70

95

120

145

170

195

220

245

270

295

ONDJFMAMJ JAS

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

7

8

9

10

11

12

13

14

15

16

17%

ONDJFMAMJ JAS

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

ONDJFMAMJ JAS

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

Evolus Inc. EOLS 22181 14377 7804 1324 93 16.8

Ligand Pharmaceuticals LGND 6894 181 6713 488 89 14.1

Cubist Corp/ CUB 3725 1664 2061 360 83 10.3

Hilltop Holdings HTH 4659 1206 3453 456 79 10.2

TrueCar TRUE 6779 6398 381 688 86 9.9

Just Energy JE 47110 42929 4181 4840 48 9.7

MEI Pharma MEIP 10634 10630 4 1224 73 8.7

Imax Inc. IMAX 109766 107115 2651 12740 90 8.6

Carmax KMX 53188 34850 18338 6380 80 8.3

Suburban Propane SPH 19490 18838 652 2612 89 7.5

EW Scripps SSP 4488 3552 936 660 95 6.8

Owens & Minor OMI 24530 12589 11941 3808 82 6.4

Digital Ally DGLY 75668 71833 3835 12424 85 6.1

Revlon Inc. REV 6273 693 5580 1060 90 5.9

Nike NKE 691216 425221 265995 127632 81 5.4

Ambac Financial AMBC 7265 6368 897 1372 91 5.3

Stitch Fix SFIX 213749 138468 75281 40184 56 5.3

Eldorado Gold EGO 72556 68462 4094 13824 51 5.2

Golar LNG Ltd GLNG 26406 17409 8997 5892 98 4.5

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