M6 BARRON’S October 12, 2020
THE STRIKING PRICE
Alibaba, given its broad scope, could act in the
role once occupied by fixed income when it was
an effective offsetto equity weakness.
Using Alibaba to Protect
Against U.S. Volatility
C
hina might be the best hedge for
U.S. stocks.
Key Chinese indexes and
stocks are outperforming their
U.S. counterparts, and investor sentiment
suggests that Asia might even emerge as an
economic haven, as America and Europe are
still struggling with the Covid-19 pandemic.
The Xtrackers Harvest CSI 300 China
A-Shares exchange-traded fund (ticker:
ASHR), a proxy for mainland China’s
stocks, is up 21% this year, compared with
8% for the S&P 500 index.
Shares of Alibaba Group Holding
(BABA), one of China’s most important com-
panies, are up 41% this year. Alibaba, given
its broad scope, might just help investors
insulate their portfolios at a time of unusual
duress in U.S. history—acting in the role
once occupied by fixed income when it was
an effective offset to equity weakness.
When President Donald Trump surpris-
ingly ended stimulus negotiations with a
Tuesday tweet, U.S. stocks sank. Many Chi-
nese stocks, notably Alibaba, held up.
Hedging U.S. portfolios with Chinese
stocks, particularly Alibaba, might seem
outlandish, but Susquehanna Investment
Group, a top options-trading firm that seeks
out noncorrelated U.S. equity investments,
has significant China exposure. The secre-
tive trading company owns a huge piece of
ByteDance, the parent company of TikTok,
that could be worth more than $15 billion.
The investment would probably dwarf any-
thing the firm’s partners have ever realized
in a long history of extraordinary success.
Alibaba will never protect a portfolio the
way traditional hedges, such as S&P 500
options, do, but Alibaba’s options premiums
and stock price aren’t as distorted ahead of
the bizarre U.S. presidential election. Cboe
Volatility Index, or VIX, trading volumes are
stunningly anemic during the oddest trading
year since the 2008-09 financial crisis, sug-
gesting that investors have little faith that
VIX derivatives will work as expected.
But adding China exposure, especially
Alibaba, to a portfolio offers hedging
through diversification.
Alibaba will hold its annual Singles Day
event on Nov. 11. For 24 hours, Alibaba will
host an online sale and celebration that
makes Amazon.com ’s (AMZN) Prime Day
seem like a Rotary Club luncheon. The com-
pany will probably report quarterly earnings
in early November.
In 2019, Singles Day sales totaled $38
billion, up from $31 billion in the previous
year. This year’s event will indicate how
much Asian consumers have recovered from
the coronavirus. Powerful sales results will
intrigue investors who are worried about the
sclerotic U.S. and European economies and
concerned about political mishandling of the
Covid-19 pandemic.
With Alibaba’s stock at $299.74, investors
can sell Alibaba’sNovember$300 put for
$17.50 and buy Alibaba’s November $305
call for $15.40. The trade generates a credit
of $2.10. If Alibaba’s stock is at $325 at expi-
ration, the call is worth $20. Should the
stock price be below the put strike price at
expiration, investors are obligated to buy the
stock at the strike price, or to cover the put
at a higher prices.
During the past 52 weeks, Alibaba’s stock
has ranged from $168.12 to $302.61. Shares
are up 73% over the past year.
Alibaba’s attraction extends beyond
hedging and diversification. The stock mon-
etizes the rise of Asia’s middle class, which
is one of the world’s greatest economic
trends. Alibaba’s scope is so broad that any-
one who buys the stock essentially gets the
Asian equivalent of a portfolio of companies
similar to eBay (EBAY), PayPal Holdings
(PYPL), Goldman Sachs Group (GS),
FedEx (FDX), United Parcel Service
(UPS), and the entertainment studios.
Reports indicate that China’s economy is
already recovering from the coronavirus.
Goldman has even advised clients that Asia
is well positioned compared with other ar-
eas because it has contained the virus. The
irony is unpleasantly rich.B
By Steven M. Sears
Equity Options
CBOE VOLATILITY INDEX
VIX Close VIX Futures
10
30
50
70
90
ND J FMAMJ J ASO
Daily Values Source: CBOE
THE EQUITY-ONLY PUT-CALL RATIO
Put-Call Ratio S&P 500 Index
40
60
80
100
120
140
160
180
200
220
240
260
280
300
320
ND J FMAMJ J ASO
Source: McMillan Analysis Corp.
SPX SKEW
Implied volatility %
8
9
10
11
12
13
14
15
16%
ND J FMAMJ J ASO
Source: Credit Suisse Equity Derivatives Strategy
NDX SKEW
Implied volatility %
8
9
10
11
12
13
14
15
16%
ND J FMAMJ J ASO
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
MyoKardia MYOK 37383 19877 17506 664 0 56.3
Alphatec ATEC 5318 4455 863 300 99 17.7
L. B. Foster FSTR^3304313916520886 15.9
Cytokinetics CYTK 39807 24006 15801 2648 92 15.0
NextEra Energy Partners NEP 11843 11309 534 796 89 14.9
BrainStorm Cell Therapeutics BCLI^345461981314733277290 12.5
Domino's Pizzo DPZ^15881482267765471308053 12.1
Corvus Pharmaceuticals CRVS 7499 4480 3019 648 85 11.6
Levi Strauss LEVI 105631 79462 26169 9804 62 10.8
Clean Energy ETF ICLN^422313981424173944100 10.7
3D Systems DDD 67874 58161 9713 6696 95 10.1
Orion Energy Systems OESX 10394 10181 213 1028 56 10.1
Ocular Therapeutix OCUL^90666197286990844 10.0
Cornerstone Building Brands CNR 13030 12763 267 1356 78 9.6
Regeneron Pharmaceuticals REGN 49331 43069 6262 5144 86 9.6
Adient PLC ADNT^20852143606492228075 9.1
RPM International RPM 7889 6778 1111 888 83 8.9
Livient LTHM 62412 56836 5576 7084 89 8.8
ReneSola SOL 11703 10122 1581 1324 88 8.8
Jinko Solar JKS^15275966393863661800098 8.5
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
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