"Gimme something I can use!" Elaine's exclamation in The English Patient episode of Seinfeld was running through my head while attempting to find some advantageous trades during Wednesday's session. The market's moves on the Trump/Ukraine/impeachment situation are inherently unpredictable and, frankly, stupid. It's just not something I can use.
In the midst of that reverie, though, there is always a repository of trading ideas that are foisted upon the stock market by the options market. Options traders like to check "the Greeks" - delta, vega and gamma - to value individual contracts, but I find it more interesting to search through the pricing of those contracts to tell me what the options markets are telling the stock markets about the valuation of underlying stocks. So, the most important metric is implied volatility- IV - and I use Barchart.com's list of the highest implied volatilities among U.S.-listed options contracts to search for stocks that are about to move.
A quick glance at Barchart's list of highest IVs shows some very interesting individual stock ideas in the midst of an overall market that has seen trading opportunities dulled by devotion to top-down ETF-based strategies. Any stock that makes Barchart's list is obviously the subject of intense speculation and should be regarded as very risky. The individual options contracts themselves are in a risk category for which I don't even have an adjective, but if you have ever played options you know that the territory of high-IV contracts is only for the non-risk averse. When they work, though, it is incredibly lucrative, and my new firm, Excelsior Capital Partners has posted fantastic returns in its first two months by correctly betting on some of these high-IV names.
So, caveats aside, here are a few names culled from Barchart's list.
McDermott (MDR) . McDermott's official statement released on September 18th was all of two sentences long, but it had the stink of bankruptcy all over it. Hopefully, anyone reading this column knows that the euphemistic nature of terms like "proactive measures" and "restructuring the balance sheet." So, Chapter 11 is not a fait accompli for MDR, but the company's unsecured bond - 10.625% notes due 5/2024 - are quoted at 26 cents on the dollar and the three scariest words for any distressed investor have been invoked in MDR's case: Kirkland & Ellis. While the firm obviously has other areas of practice, I have watched Kirkland & Ellis shepherd countless energy companies through Chapter 11 filings since the bust began in late 2014.
Equity is worthless in a bankruptcy, but the market seems split on MDR's fate as the Oct 18th $1.50 put and $3.00 call are both trading at IVs between 220%-235%. I never want to be on the opposite side of Kirkland and Ellis in a distressed station. I would buy the puts.
NIO (NIO) . NIO management cancelled its scheduled conference call Tuesday after releasing a 2Q report showing very few deliveries of its ES6 and ES8 battery-electric SUVs in its only market - China - and massive losses on the small number of vehicles produced. I am an old sell-side auto analyst and cancelling a conference call is a very, very scary sign. Long-term, tree-hugging believers like Baillie Gifford are taking an absolute bath on NIO, as the Tesla of China has fallen apart more quickly than the Tesla (TSLA) of America. The only possible positive outcome is for original sponsors Tencent (TCEHY) and NIO's founder, Bitauto entrepreneur William Li, to take this thing private. There is no way out as a public company unless the Chinese auto market - which has posted 14 consecutive months of declining sales - magically recovers and Chinese consumers magically start buying high-end BEVs. I don't do magic. Writing NIO calls to collect the massive premia is the wise play here.
I mentioned Tesla in the NIO section, and there is no way I am going to go into a TSLA quarter-end without having a position on those shares via options contracts. What's my position? Well, I am out of column space today, but in tomorrow's column I will reveal what the options market is predicting for Tesla and also high-flyers Roku (ROKU) and Beyond Meat (BYND) .