UBS Says Sell S&P 500 Options Given Likelihood of Less Market Volatility
Investors should sell Standard & Poor’s 500 Index options to profit from a “range-bound” equity market that’s likely to fluctuate less this year, UBS AG said.
Investors should sell December 1,200 calls and December 1,000 puts, a strategy known as a “strangle” that profits from decreasing volatility, UBS options strategist Mitchell Revsine wrote in a note. Options prices indicate that the S&P 500, which fell 0.7 percent to 1,106.13 at 4 p.m. New York time today, won’t exceed 1,250 -- a level near its high since Lehman Brothers Holdings Inc.’s 2008 bankruptcy of 1,255.08 -- or decline to a one-year low of 950, he wrote.
The S&P 500 has rallied 7.3 percent this month, erasing a 2010 loss of as much as 8.3 percent as economic reports signal that the recovery may continue. Since July 12, 81 percent of S&P 500 companies reporting quarterly results have topped estimates. The index is still down 9.1 percent from the 19-month high of 1,217.28 it reached on April 23.
“The optimal outcome at expiration would be for the index to be above the put strike and below the call strike, in which case the entire premium would be retained,” the New York-based strategist wrote. “The option market is currently implying a 66 percent probability that the trade will be profitable, to some degree.”
Selling a strangle is a bet that the shares won’t move beyond either strike price before expiration, allowing the seller to keep what the buyer paid. Options are derivatives that give the right to buy or sell assets at a set price by a specific date. Investors use the contracts to guard against fluctuations in the price of securities they own, speculate or bet that volatility, or price swings, will increase or decrease.
To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.
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