October 26, 2020 BARRON’S M5
THE STRIKING PRICE
The key is focusing on the companies that
stand to benefit from a vaccine and findinga
reasonably cost-effective wayto invest.
Preparing for a Vaccine
With Call Options
T
he gods must have an evil sense
of humor.
Covid-19 has forced tens of
millions of people to spend more
time than ever before at home—often glued
to TVs or computer screens—and everyone
is under a nearly constant assault of nasty
political ads.
The content is so grating and outrageous
that PsyOps warriors could stream the ads
to psychologically weaken enemy combat-
ants, instead of blaring the sounds of hyster-
ically crying babies at them. By Nov. 3, the
nastiness may end—or begin anew—when
the world learns whether Donald Trump
will remain president or if Joe Biden, his
Democratic challenger, will succeed him.
Many polls predict that Biden will win,
and some suggest that Trump’s loss will be
profound. It’s dangerous to be overconfi-
dent, though much of Wall Street now is.
When Trump last ran, Hillary Clinton was
expected to trounce him—and the Street
was wrong in a “Dewey Beats Truman”
kind of way.
It’s time to start looking past the politi-
cal theater to what happens next. Eventu-
ally, Covid-19 will be controlled by a vac-
cine. When that happens, restaurants will
once more flourish, people will travel, and
the financial and commercial real estate
sectors will probably normalize.
Without a doubt, wagering on vaccines,
like much of pharmaceutical-sector invest-
ing, is hard for anyone without specialized
scientific knowledge. The key to covering the
knowledge gap is focusing on the companies
that would benefit from a vaccine and find-
ing a reasonably cost-effective way to invest.
John Marshall, a Goldman Sachs deriva-
tives strategist, recently advised clients to
consider 35 stocks that would benefit when
the economy fully reopens. The stocks have
trailed the S&P 500 index by about 10%
over the past month and about 48% this
year. “The reopening trade does not appear
crowded,” Marshall wrote in a recent note.
Goldman’s “Positive Reopening Reactors”
includeAmerican Airlines Group(ticker:
AAL),Alaska Air Group(ALK),Delta Air
Lines(DAL),SL Green Realty(SLG),
United Airlines Holdings(UAL),Simon
Property Group(SPG),Boeing(BA),Zi-
ons Bancorp(ZION),Host Hotels & Re-
sorts(HST),Kohl's(KSS),Kimco Realty
(KIM),PVH(PVH),Wells Fargo(WFC),
andHuntington Bancshares(HBAN).
Others includeNorwegian Cruise Line
Holdings(NCLH),Textron(TXT),Loews
(L),Boston Properties(BXP),Carnival
(CCL),Federal Realty Investment Trust
(FRT),U.S. Bancorp(USB),Nordstrom
(JWN),Prudential(PRU),UDR(UDR),
Marriott International(MAR),Royal
Caribbean Group(RCL),Ralph Lauren
(RL),Vornado Realty Trust(VNO),
Southwest Airlines(LUV),CBRE Group
(CBRE),Regency Centers(REG),Equity
Residential(EQR),Raytheon Technolo-
gies(RTX),Essex Property Trust(ESS),
andGeneral Electric(GE).
Goldman told clients to buy bullish call
options on the stocks, an approach that costs
less than buying equities. (Calls give the
holder the right to buy a security at a set
price and time.) Timing is key, so look for
stocks that are intriguing, choose one-month
expirations, and pick strike prices that are
5% to 10% above the stock price. The aver-
age 10% out-of-the-money call on the group
costs about 2.9% of the stock price.
Using calls as stock surrogates is risky.
Buying call options on stocks that don’t
advance, or that decline, often generates
losses. Once a call is bought, be prepared
to sell it once it nears expiration and to
“roll” into the next month, ideally by buy-
ing another call that costs less or the same
amount. Sometimes, more money is needed
to adjust the trade.
This style of investing isn’t for everyone.
It’s hard to identify compelling themes, and
to cost-effectively control investments,
while waiting for the upside to emerge.
Those who can, however, often find them-
selves on the right side of events.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
30
50
70
90
110
130
150
170
190
210
230
250
270
290
310
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
Uxin UXIN 23349 21291 2058 508 89 46.0
Netgear NTGR 30323 15187 15136 896 73 33.8
Sunnova Energy NOVA^18451292315528191284 9.7
IRobot IRBT 90589 33278 57311 10568 58 8.6
Endurance Int'l EIGI 6155 5802 353 796 70 7.7
Logitech LOGI^679084331224596919674 7.4
Winnebago WGO^24552205484004331674 7.4
Halozyme Therapeutics HALO 8425 7615 810 1160 58 7.3
UBS UBS 12549 7276 5273 1736 49 7.2
Outfront Media OUT^1467614373303270876 5.4
Pitney Bowes PBI 29331 27376 1955 5520 76 5.3
Align Technology ALGN 22489 12216 10273 4356 74 5.2
Snap SNAP 2390011 1483180^90683152172860 4.6
Village Farms Int'l VFF 31949 31148 801 6980 80 4.6
CoreCivic CXW 32565 26494 6071 7792 99 4.2
Teradyne TER^307821950011282734067 4.2
Nokia NOK 324191 295214 28977 78144 86 4.1
Parsley Energy PE 31222 15205 16017 7932 68 3.9
Adapimmune ADAP 5970 4893 1077 1552 97 3.8
Hilton Grand Vacation HGV^1221891933025324472 3.8
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