Buy Protection When You Can, Not When You Need To…

With major US indices approaching multi-year highs and volatility, as represented by the VIX, seemingly heading towards the 15-level we decided to look for opportunities to purchase cheap protection in names that have outperformed the broader market. Investors appear to have entered a state of complacency now that 2Q earnings season has largely passed and the Fed and ECB have committed to do what is necessary to prevent further significant economic deterioration. To us, this signals an appropriate time to lock in yearly gains and purchase cheap protection against the unknown as it is better to buy protection when you can, rather than when you need to.

Technical Take: The VIX continues to drift down near a retest of a significant 2011 low. The indicator has paused just above support. VIX is flashing a potential “big move” or volatility expansion. The price pattern suggests the path of least resistance is up. Resistance is at the 200 DMA near 21.20; then 27.20.

For purposes of our analysis we let current implied volatility rankings, along with year-to-date performance and average options volume, guide us in identifying the most appropriate names to purchase protection on through year end.

Financials Vol Appears Attractive: Much to our surprise 4 out of the top 15 spots in our list emanate from the financials sector. 6-month implied volatility in Goldman Sachs (GS), Wells Fargo (WFC), Discover Financial (DFS), and US Bancorp (USB) is currently trading at or just above 52-week lows. Purchasing protection in these heavy macro-influenced names could make a lot of sense here. For example, investors could purchase January at-the-money puts in GS for roughly $9.30, approximately 9% of notional, using yesterday’s closing prices. For comparison purposes, an at-the-money put purchase in GS a month ago would have cost over 10.5% and two months ago 12.5%.

Options Trading Recap: We continue to see bullish tech flow highlighted by October 60 call buyers in QCOM and Sep 31 call buyers in the XLK. Other notable options trading activity included upside call buyers in the GDX Gold Miners ETF, put spread buyers in the XOP, and over 10k RCL Sep 25 puts were purchased in early trading.

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Philip A. Saunders

Mr. Saunders serves as Mesa’s Vice President of Marketing, bringing with him a wealth of experience in strategic marketing and operations. In this role, Mr. Saunders is responsible for overseeing all marketing activities, utilizing a blend of traditional and digital strategies to enhance brand presence and profitability, managing a multi-million dollar marketing budget across various media platforms, and leading the continued implementation of CRM systems to streamline customer engagement and drive business growth.