I am proud to introduce a weekly series that I will be doing each Tuesday with Fidelity investments where I will offer market commentary and detail strategies for investors on how to use options to add yield and/or leverage and manage risk in the investment/trading portfolios.
You can watch the first episode by clicking below:
You can find the latest video every Tuesday afternoon here, but I will also send them out via email and Twitter.
In yesterday’s video, I detailed some considerations for drivers of equity returns this year and discussed the relative cheapness of short-dated SPY (ETF that tracks the S&P 500) options for those looking for put protection, with the recent introduction of geopolitical risks to the list of concerns that include relatively low global growth with little clarity on the trade front.
Last night on CNBC’s Fast Money we discussed all of these issues and I was asked about portfolio protection ideas,
Taking a quick look at the SPY, the uptrend off of the early Oct lows is near perfect, up nearly 15%, and up about 8% since it broke out to a new all-time high in late October. It is worth noting that while the two-month move looks fairly parabolic, many investors who rely on technicals will not sell stocks until the index closes below the uptrend in a convincing fashion. I would add that the SPY’s 150-day moving average is right at the breakout level just above $300 that should serve as near-term technical support:
As mentioned above, short-dated options prices are cheap relative to how much the index is moving, but also on a historical basis, with 30-day at the money implied volatility at 10.7% implying less than 1% daily moves (blue line, below) but also the spread between implied vol, and realized volatility (how much the ETF is actually moving, white line below) is at a fairly narrow spread with the Index at such steep levels, implying that long premium directional strategies make sense in ETFs like SPY for those with a directional view:
To put this another way, SPY options are also dollar cheap, with the ETF that $326.25 the Feb 326 straddle (the call premium + the put premium) is offered at $10 or about 3% of the price of the SPY, that is the implied movement of the SPY between now and Feb 21st, which seems pretty low given the fact that we are about to go into earnings season, we have little clarity on what exactly is in the Phase One Trade “deal’ and the situation with Iran is anything but in the rearview mirror. If the at the money Feb 326 straddle is $10, that means the Feb 326 call is about $5 and the Feb 326 put is about $5, or only 1.5%… so you are telling me that if you wanted to express a view over the next month in either direction that it would only cost 1.5% to that, with defined risk, I’d tell you that is super cheap no matter what your directional inclination. Options prices in SPY are begging you to scratch whatever itch you have.
Also in the Fidelity video, we touched on Apple’s (AAPL) tremendous price performance over the last year… regular readers know my view on the company, I think it is amazing, the stock well that has been amazing, but I just can’t figure out why it squeezes higher every day, up more than 100% in the last year, gaining almost $700 billion in market cap in a year where earnings and sales did not grow in fiscal 2019 and they are only expected to grow 10% and 6% respectively.
While I get why long term investors don’t ever want to sell stocks like AAPL, it might make sense in front of potentially volatile events like upcoming earnings to consider hedges, possibly collars. Here was the example we used the other day when AAPL was trading $300, it is now higher and would adjust strikes higher if this is the sort of strategy that interests you against you long stock:
Collar against long stock implies selling an out of the money call and using the proceeds to buy and out of the money put… this options overlay allows for gains in the stock to the short call strike but capped there, and losses down to the long put strike, but protected below
For instance vs 100 shares long of AAPl at $300 an investor could Buy Feb 325 – 275 collar for even money
-Sell to open 1 Feb 325 call at $3.40
-Buy to open 1 Feb 275 put for $3.40
Break-even on Feb expiration:
Profits up to 325, capped above, the shareholder could always cover the short call to keep long position intact.
Losses down to 275, protected below
Rationale: an investor would only do this if they were more concerned of suffering losses down 8% vs capping their gains up 8% between now and Feb expiration, which will catch Fiscal Q1 earnings.