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September 5
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Jobs Report Does a Number on Options Traders
"GET RICH, OR DIE TRYIN'."
Who would have thought that 50 Cent, the New York-born rapper, had a firm grasp of the global financial markets, and the psyche of John and Jane Consumer?
After all, "Fitty" popularized the phrase "get rich or die tryin'" and that seems to aptly express sentiment, in the options market and elsewhere as investors and traders chafe today under the weight of an August jobs report that suggests housing sector woes are now adversely impacting the economy.
The option's market's fear gauge, the Chicago Board Options Exchange's Market Volatility Index (VIX), was recently up about 8% at 25.82. The implied volatility of put prices, which let investors pick the price at which they want to sell a stock, are up across the market.
On the "get rich" side of the equation, the latest jobs report is expected to increase the pressure on the Federal Reserve to lower interest rates at its September 18 meeting.
Nonfarm payrolls in August declined by 4,000, the first decline since August 2003, according to the Labor Department report. Previous reports also were revised sharply lower. July job growth was revised down to 68,000 from 92,000. June gains were revised to 69,000 from 126,000.
Some major investors are selling richly-priced puts to potentially lower the acquisition cost of favorite stocks they want to add to their portfolios.
Other investors, who don't manage multi-billion portfolios, but are interested in increasing stock holdings, may want to consider a special strategy to build positions. Say you want to buy 20,000 shares. The strategy entails buying 10,000 shares, and selling puts that represent the other half.
On the "die tryin'" side, the market could get a lot tougher between here and September 18, and maybe even beyond.
The jobs report indicates that employment fell for the first time in four years in August, reflecting steep declines in construction and manufacturing payrolls.
In the options market, the employment report incited another rush of hedging activity as investors, and downside speculators tried to ward off the effects of another sharp stock decline. Options on the S&P 500 exchange traded fund (SPY) attracted enormous trading in the September 140 to 148 strikes. With the SPY recently at about 146, the interest in downside puts -- and the just out-of-the-money 145 strike attracted the bulk of trading interest -- suggesting a possible expansion of fears. After all, what if the Fed does not lower rates at its September 18 meeting?
Similar trading patterns are evident in puts on the Nasdaq-100 and the Russell 2000. Options on the Select Sector Financial SPDR also have a bearish tint, and the mood is likely to continue to darken as investors prepare for the investment banks to report earnings that will provide an unadulterated view of how bad (or not so bad) the sub-prime mortgage mess really is.
Indeed, it is probably best to refrain from concluding that the recently strong August retail sales report suggests that John and John Consumer are financially healthy and stable. A recent conversation with a southeastern property appraiser indicated that he and his colleagues have been under significant pressure from lenders these past years to increase the value of homes they were evaluating. Why? So credit card debt could be rolled into mortgages. These mortgages may cover many financial sins and the unraveling could lead to even more significant problems not only in the real estate lending and housing markets, but all the way to the store.
Take Harley-Davidson, for example. The biggest U.S. motorcycle maker cut profits for the second time this year. HOG, which is Harley's ticker symbol, also said that while it had provided earnings guidance for 2009, it would not do that anymore. The chief executive, in a statement revising earnings guidance, said "this is a difficult time for the U.S. consumer.'' And, by extension for the biggest U.S. motorcycle maker whose stock is down 23% year-to-date. Harley options are not actively traded, but the sharp decline in the stock today has prompted activity in September and November puts that give investors the right to sell the stock, recently off 9% at about $49.33, at $50.
HOG's troubles brings to mind the old market adage that bulls make money, bears make money, but pigs get slaughtered -- especially ones who are overleveraged and living off other people's money.
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Comments: steven.sears@barrons.com
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