Rallies by the biggest U.S. hotel operators to the highest levels in more than a year and concern about American job growth is prompting options traders to pay record prices to protect against losses.
Puts priced 10 percent below shares of Marriott International Inc. (MAR), Starwood Hotels & Resorts Worldwide Inc. (HOT) and Wyndham Worldwide Corp. (WYN) cost an average of 1.25 times more than calls 10 percent above, according to data on three-month options compiled by Bloomberg. The relationship known as skew reached a record 1.3 on April 27.
Marriott, Starwood and Wyndham jumped 67 percent on average since the Standard & Poor’s 500 Index’s low in October, propelled by earnings that beat analyst projections. Investors are protecting gains as the European debt crisis intensifies and the slowest job growth in six months undermines confidence in the U.S. economy, according to Banyan Partners LLC.
“The leisure industry is being affected by concerns about Europe and the weaker U.S. jobs report, which have the potential to negatively affect consumer spending and reduce the discretionary income used on travel,” Robert Pavlik, who helps manage about $1.3 billion as chief market strategist at Banyan Partners in New York, said yesterday in a telephone interview. “A lot of people are exploring the possibility of putting on short- to intermediate-term hedges through either buying puts or selling calls.”
Margo Happer, a Wyndham spokeswoman, declined to comment on the options trading. Jennifer Centrone, a spokeswoman for Starwood, and Marriott’s Thomas Marder didn’t return phone calls and e-mail messages seeking comment.
Last Week’s Drop
The hotel operators dropped last week from their highest levels in more than a year as the S&P 500 (SPX) posted its biggest weekly drop of 2012 after data on the American and European labor markets boosted concern the global economy is weakening. U.S. payrolls increased less than economists projected in a Bloomberg survey, and unemployment in the euro zone rose to a 15-year high.
Marriott, the largest publicly traded U.S. hotel chain, surged the most since November on April 19 after raising its forecasts for 2012 profit amid greater business-group demand. Starwood, owner of the luxury St. Regis and W brands, jumped to an almost one-year high on May 2, less than a week after sales of vacation units at a new resort in south Florida drove a more than fourfold increase in first-quarter income.
Wyndham, the franchiser of Days Inn hotels and Super 8 motels, jumped to a record on May 3 after earnings beat estimates a week earlier.
Locking in Gains
“You might find that people are looking to maybe take some profits or lock in some of the gains,” Chris Agnew, an analyst at MKM Partners LLC, said in a phone interview yesterday. He recommends investing in all three companies. “They’re names that people definitely want to own, and people might just be hedging in case there’s some volatility this summer. You may just want to say, ‘Look, if we get a repeat of last summer, I want to protect myself, but I want to stay long the stock.’”
Marriott tumbled 6.6 percent, the most in two years, on July 14 after reporting room revenue that trailed industry growth and saying timeshare sales declined. The shares fell to a 19-month low in September, while Starwood reached an almost 20-month low in October. Wyndham touched its lowest price in 11 months last August as the S&P 500 sank after Moody’s Investors Service cut Portugal and Ireland’s credit ratings to junk levels and the U.S. government struggled to avert a default.
The world’s largest economy expanded at a 2.2 percent annual rate in the first quarter after a 3 percent pace in the prior three months, Commerce Department figures show. Occupancies this year through March at luxury hotels in the U.S. climbed to 71 percent from 68 percent a year earlier, according to Smith Travel Research Inc. of Hendersonville, Tennessee. That compares to an increase to 65 percent from 63 percent among all hotel types in the top 25 U.S. markets.
“Lodging stocks are impacted by the U.S. economy where most people continue to see tepid growth, but enough to create positive demand,” Smedes Rose, an analyst at Keefe Bruyette & Woods Inc. in New York, said yesterday in a phone interview. “We’re getting healthy and stabilized occupancy levels, which should drive incremental pricing power. Once you know the demand is there, you’re more willing to raise rates.”
Rose has an outperform rating on Marriott and Starwood, meaning he expects their shares to return about 15 percent. He doesn’t cover Wyndham.
The Chicago Board Options Exchange Volatility Index, known as the VIX (VIX), gained 5.4 percent to 20.08 yesterday. Europe’s VStoxx Index, a measure of Euro Stoxx 50 Index option prices, declined 0.4 percent to 31.21.
Marriott’s July $36 puts, priced 8.1 percent below yesterday’s close, were the most-owned among all of the company’s contracts, according to data compiled by Bloomberg. Wyndham’s options betting on a 15 percent decline to $43 by August had the biggest open interest among all of its bearish contracts.
Bearish options volume for Starwood rose yesterday to six times the four-week average and was double call trading. A block of 3,900 June $55 puts changed hands at the ask price, data compiled by Bloomberg show. January $45 puts, priced 21 percent below yesterday’s close, and May $52.50 puts had the largest open interest.
“With the market uncertainty of recent, perhaps the pickup in put volume in Starwood is justified as the hotel stocks have had a nice run this year,” Lillian Seidman-Davis, an options strategist at Miller Tabak & Co. in New York, said in an interview yesterday. “It seems like a smart bet for clients to consider protecting gains.”