Barron's - USA (2020-12-07)

December 7, 2020 BARRON’S M5

THE STRIKING PRICE

The phenomenon of little investorsmaking big

profitshas become such a factor in the options

market that it is now monitored by major firms.

Tesla Is About to Join the

S&P 500. How to Play It.

I

t’s an overstatement to assert that bull-

ishly trading options onTeslais like

having a license to print money. But

not much of one.

The stock has rallied so much this year

that anyone with some cash has often ef-

fortlessly made money by selling puts, or

buying calls, or even selling calls that are

far above Tesla’s (ticker: TSLA) stock price.

So far this year, the stock has gained 616%,

sharply outperforming the S&P 500 in-

dex’s 15% gain.

On Reddit—a chat room for people

younger than you and me—a trader with

the handle Osbetel says that he turned

$5,000 into almost $500,000 trading

Tesla options, according to MarketWatch.

Osbetel says that he hopes to make $1 mil-

lion by year end.

The trader’s alleged success is sure to

strike many investors as preposterous, but

the phenomenon of little investors with

little wallets making big profits has become

such a factor in the options market that it is

now regularly monitored by major firms.

Each day, for example, Susquehanna

Financial Group sends clients a roster of

message-board trading activity. Tesla is

often included, as are options on most any

stock that reeks of momentum. The little

traders are increasingly viewed by big

traders as a force that moves markets.

“If you believe in Elon Musk and his

messianic fervor that he will change the

world, you have been richly rewarded,

and the more leveraged you are to Tesla

success, the better you did,” says Steve

Sosnick, Interactive Brokers’ chief strate-

gist, who is nonetheless wary of the zeal

around Tesla.

Still, the Tesla trade may enter a turbo-

charged zone when Tesla joins the S&P

500 on Dec. 21. The stock’s inclusion in the

market benchmark means that index funds,

exchange-traded funds, and investors

who track the index must buy Tesla’s stock.

Shares of the electric-vehicle maker—

actually, Teslas are more like computers on

wheels—should benefit from all of this

forced buying, which, in turn, could create

constructive conditions for options trading.

It is likely that some investors who will

soon be forced to buy the stock are among

Tesla’s legion of haters—those as convinced

that the company is bad as fans are that it’s

creating a greener future with electric cars.

This disagreement should provide enough

tension for a short-term bullish trade that

seeks to take advantage of Tesla’s stock

joining the index.

With Tesla trading around $599, aggres-

sive investors can sell its January $580 put

option and buy its January $600 call option

for about $10. Both expire Jan. 15.

The risk-reversal strategy—selling a put

and buying a call with a higher strike price

and the same expiration—expresses a will-

ingness to buy the stock on a decline and to

participate in rallies. The expiration cap-

tures the index inclusion and the weeks

leading up to Tesla’s next earnings report,

which should be released in late January.

If Tesla’s stock is at $620 at expiration,

the call is worth $20. Should the stock de-

cline—and any stock that has rallied so far

so fast is always susceptible—the short put

will become an expensive problem. Only

consider the trade if you can afford to buy

the stock.

During the past 52 weeks, Tesla’s stock

has ranged from $66.95 to $607.80. Over

the past year, the stock is up 792%.

Without doubt, the trade oozes leverage

and reeks of volatility. Only consider it if

you can afford to buy Tesla stock at a lower

price. What could drive it lower? There is

chatter that some institutional traders—and

many loathe Tesla—will sell the stock be-

cause the index inclusion could be as good

as it gets for Tesla for quite some time. The

stock has recently been mixed.

Of course, many such sound reasons

have been cited in the past, and all that

has happened is that Tesla’s stock has

destroyed doubters and made Musk one

of the world’s wealthiest people.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

30

50

70

90

JFMAMJJASOND

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

JFMAMJJASOND

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

JFMAMJJASOND

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

7

8

9

10

11

12

13

14

15

16

17%

JFMAMJJASOND

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

Nesco NSCO 9806 5180 4626 68 100 144.2

Merrimack Pharmaceuticals MACK 15092 10155 4937 152 98 99.3

CEMEX CX^33873231448724245623285 54.4

Tredegar TG 4039 1768 2271 124 100 32.6

Paya PAYA 2992 2912 80 96 16 31.2

Arlo Technologies ARLO^73829647469083244098 30.3

Schultze SPAC SAMA^1139710101129641286 27.7

China Automotive Systems CAAS 33574 17097 16477 1332 99 25.2

G1 Therapeutics GTHX 8739 7385 1354 352 86 24.8

Curis CRIS^109691069727251287 21.4

Blackberry BB 925067 758349 166718 43580 97 21.2

Casa Systems CASA 8584 7998 586 464 84 18.5

AquaBounty Technologies AQB^21231173223909121291 17.5

Splunk SPLK 212513 136305 76208 15180 82 14.0

Oramed Pharmaceuticals ORMP 7997 7561 436 592 95 13.5

Waddell & Reed WDR^1777181709601131661 13.5

Shutterstock SSTK 16361 15490 871 1220 92 13.4

Catabasis Pharmaceuticals CATB 26889 23993 2896 2392 100 11.2

Sportsman's Warehouse SPWH 28529 24486 4043 2920 66 9.8

QuantumScape QS^290477201949885283691238 7.9

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