The Striking Price

Options Opportunities Amid Stocks' Sharp Declines

Share prices have fallen, and may fall further. Still SPDR Gold Trust, Microsoft, and SPDR S&P 500 beckon some investors.


Saturday, January 23, 2016

Last week, scientists discovered what appears to be a new planet on the edge of our solar system. Planet Nine, as it is now called, is larger than Earth and apparently covered in ice, which has a certain appeal after several fiery weeks in the financial markets.

Our terrestrial markets are an amalgamation of purgatory and hell. Stock prices are volatile. Investors are often torn between confusion and nonchalance. Panic, which would mark the end of the decline, is hard to detect. The CBOE Volatility Index, the stock market’s fear gauge, is relatively muted even as strategists sound their tocsins about the Standard & Poor's 500 index.

Raymond James' Jeff Saut is telling clients that lower highs and lower lows await them.

JPMorgan's Marko Kolanovic believes that an unprecedented divergence among assets may herald a bear market.

"Since the last bear market seven years ago, the S&P 500 is up about 200% and still near all-time high levels. The U.S. Dollar Index is also at its highest point in 15 years (since the tech bubble). On the other hand, a large number of risky assets are in the opposite situation: Emerging-market equities, EM currencies, and commodities are…trading below levels during the great recession of 2008-09," says Kolanovic in a note.

While many investors prefer watching stock carnage from the sidelines, chaos usually creates opportunity. Good companies are still good companies. The only thing that has changed, based on current information, is that their stock prices are lower.

We have advocated selling puts on blue-chip stocks that pay reliable dividends. We suggested puts that expire in less than three months with strike prices 5% to 10% below the market. Those puts have probably caused investors to buy stocks at lower prices. We still like the strategy, even though the market’s ferocious decline has been surprising. We’ve recommended some VIX upside call trades, too.

Across the options market, investors are demonstrating a strong interest in buying upside calls on the SPDR Gold Trust (GLD), which reigns as the feel-good asset in times of economic duress.

With GLD trading near $105, top trades include the purchase of 20,000 April 125 calls against 10,000 short June 130 calls for 92 cents. Another investor bought 8,000 February 107 calls and sold the same number of February 109 calls for 38 cents. Others are buying March 106 and 110 calls, or spreading the March 110 strike against March 118 calls.

Microsoft (MSFT), meanwhile, continues to attract attention. With its earnings report slated for Thursday, an investor bought 30,000 April 60 calls and sold the same number of April 65 calls for 34 cents. The stock was recently around $51, so the spread indicates expectations of a massive rally. In fact, the spread anticipates such an extraordinary stock rally that the trade seems delusional, but somebody who probably owns more than three million shares of the stock disagrees.

IF SINGLE-STOCK RISK makes you uneasy, trade the market. An aggressive trade— and you are paid nicely for the risk—is selling puts on the SPDR S&P 500 ETF Trust (SPY) in anticipation that prices will rise by early summer.

When SPY was trading around $187, the SPY June 184 put was $10.02. The plump put premium can be kept if SPY stays above the strike. If the opposite occurs, investors are long stocks below $184, or they are covering the short put at a higher price. Of course, only do this SPY trade if you believe that the current difficulties are temporary. Selling puts in a volatile market is risky: If the stock falls sharply below the put strike price, the investor can lost big.

Of course, the opposite is true, too. "When the market rallies, everything will rise," says Michael Schwartz, Oppenheimer & Co.'s chief options strategist.

Reprinted by permission of Barron's Online, © 2016 Dow Jones & Company, Inc. All Rights Reserved Worldwide.

The views expressed in the above papers and articles are solely those of the author of the article, and do not necessarily reflect the views of OIC; the information presented is not intended to constitute investment advice or recommendations to purchase or sell securities of any company; and the information presented is based upon particular events that may or may not recur in the future.

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