Options volumes now greater than shares volumes Table of Contents 23 July 2020 | 4:15AM EDT Single stock options volumes have risen to record highs in July, with notional volumes up 129% YTD and 35% over the past month alone. The average daily value of options traded has exceeded shares for the first time, with July single stock options volumes currently tracking 114% of shares volumes. A significant portion of this increase has been driven by higher volumes in short dated contracts. Trading in single stock options with less than two weeks to expiry increased to an all-time high of 75% of total volume, up from 65% this time last year. With the options market now larger than the shares market, we believe it is critical to understand how investors are positioned in options. Inside, we list stocks with the highest notional options volumes traded in July. Among the top names are AMZN, TSLA, AAPL, NFLX and FB. Notably, bullish sentiment on a number of names, as indicated by options market skew, is at extremely high levels. Three-month normalized put-call skew in AMZN, TSLA, SQ and MRNA have declined to below 0. Negative skew is a relatively rare statistic for large cap names such as AMZN (where three month skew is currently at all-time lows), implying crowding in long AMZN calls. Today, we recommend the following catalyst-driven trade ideas: Trade #1: Buy straddles ahead of CLX earnings on August 3rd; our analyst is bearish over the next year but sees a boost to 2Q, driven by the COVID-19 pandemic. Trade #2: Buy UPS straddles for earnings on July 30th; 2Q mix was likely negatively impacted from lighter weight residential shipments. Trade #3: Buy calls ahead of SPGI earnings on July 28th; consensus is likely underestimating gains from record IG issuances. Trade Update: We initiated four new recommendations to buy options in Energy stocks in our note "Options market positioning ahead of 2Q20 Majors & Refining earnings", published on July 22, 2020. We closed our recommendations to buy DOV and PEP calls at gains, while recommendations to buy BK and STT calls expired at losses, between publications. Today, we close our recommendation to sell CNQ puts, at a gain. [paste:font size="5"]Single stock options volumes are 114% of shares volumes Single stock options volumes have risen to above shares volumes for the first time. Single stock options volumes in July are 114% of shares volumes, and have increased to record high levels over the past few weeks. While equity trading activity increased to all-time highs in March of this year, and has declined since then, options trading activity has increased 129% YTD (up 35% from June levels). Last month our analysis showed increased activity by individual investors contributed to growth in volumes this year. Options trading activity by individual investors comprised 10% of volumes in large liquid names at the beginning of 2020, and is currently up to 15%. This compares to a 60% increase in total single stock options contract volumes YTD. Source: Goldman Sachs Global Investment Research, OptionMetrics, Data as of 21-July Source: Goldman Sachs Global Investment Research, OptionMetrics, Data of 21-July Single stock options volumes for near-term maturities are at all-time highs. The proliferation of weekly options, and increased focus on using options to trade catalysts, has likely boosted growth in shorter dated (options with less than 2 weeks to expiry) trading strategies. While weekly maturities on single stocks became popular in 2012, volumes in short dated options typically comprised 50-60% of total volumes until 2017. This changed in 2018, as the volatility spike early in the year likely led to investors increasingly trading short dated options, driven by low absolute premiums and better visibility of the catalyst path. In 2020, volumes in short dated options have increased to record highs. Single stock options with maturities less than 2 weeks now comprise 75% of all maturities. Investors have increased focus on trading calls in recent weeks, with volumes of short dated call options having increased rapidly relative to puts. Source: Goldman Sachs Global Investment Research, OptionMetrics, Data as of 21-July Source: Goldman Sachs Global Investment Research, OptionMetrics, Data as of 21-July Which stocks have fueled the sharp rise in options volumes? Options volumes have been driven higher by an increase in trading in many of the large market cap names. AMZN, TSLA, AAPL, NFLX and FB had the highest volumes in July. Among the top 25 underliers with high notional volumes, MRNA, WMT, NKLA and TSLA saw the biggest jump relative to the prior 12-months. Source: Goldman Sachs Global Investment Research, OptionMetrics, Data as of 21-July Trade #1: Buy CLX straddles ahead of earnings Goldman Sachs Consumer Staples analyst Jason English sees downside to CLX over the next 12 months, even as 2Q sales likely received a boost, driven by the COVID-19 situation. CLX’s Cleaning segment (34% sales) has benefited from increased consumption of sanitation & hygiene related products by consumers to reduce COVID-19 contraction risks. Jason notes, however, the company lost market share in Nielsen measured channels, likely due to out-of-stock, but he also expects competitors to step-up their engagement and add capacity in the future. He attributes the recent market share gains in Household (30% sales) to the company’s ability to fill the short term spike in demand from depleted retailers, due to the pre-COVID slack in capacity. As such, he expects the category growth to fade as the US transitions away from COVID-19. Further, COVID-19 is unlikely to have a meaningful impact on its Lifestyle segment (20% sales) as the strength from certain categories (e.g., salad dressings) is likely offset by weakness in others (e.g., Burt's Bees). Overall, Jason downplays market optimism on CLX being able to deliver FY21 EPS in the range of $8.50-$9.00 (GSe $7.75), although he does see a near-term surge in profitability. CLX’s options imply a +/-6% move on earnings on August 3rd, modestly above its 8Q average earnings-day move of +/-5%. One month implied volatility of 31 has ticked up in recent weeks, but remains at average levels relative to its relationship with the XLP. CLX one month normalized put-call skew has increased off multi-year lows, but continues to show bullish positioning relative to the past year. We recommend investors position for increased volatility heading into the event with the long CLX 7-Aug Weekly $227.50 straddles, recently offered at $14.00 (6.2%, stock $227.55). Straddle buyers risk losing premium paid if the stock closes at strike price on expiration. Trade #2: Buy UPS straddles ahead of earnings Bullish positioning in UPS options is in-line with the highest level since 2015. Goldman Sachs Transportation analyst Jordan Alliger sees margins holding up, but notes mix is likely to suffer. Jordan is 7% above Bloomberg consensus EPS estimates, and highlights positive read-across from already-reported competitor FDX shows potential for normal seasonality in margins, even if the higher-density B2B business remains pressured. Jordan notes, 2Q was a tough quarter for Parcel given global lock downs, with mix likely negatively impacted from lighter weight residential shipments, given a large proportion of the population stayed at home. However, he highlights the company may realize better domestic and overall corporate EBIT margins owing to seasonality (early signs already seen in June) and as B2B activity comes back gradually to pre-COVID levels, UPS will start to see better profitability. UPS options imply a +/-6% move for the July 30th earnings, in-line with its 8Q average earnings-day move. One-month implied volatility of 34 is at average levels relative to the broad Industrials space (XLI). While the stock has outperformed the XLI this year (UPS +2%, XLI -12%), the options market is positioned for further outperformance. One-month normalized put-call skew is at one year lows, and close to the lowest level since 2015. Heading into earnings, we recommend investors buy the UPS 31-Jul Weekly $119 straddles recently offered at $7.45 (6.3%, stock $118.72). Straddle buyers risk losing premium paid if the stock closes at strike price on expiration. Trade #3: Buy SPGI calls ahead of earnings Goldman Sachs Info Services analyst George K Tong believes S&P’s best-in-class exposure to non-transaction revenue and record US IG issuance sets the stage for a positive surprise in 2Q. George highlights that SPGI has anchored itself to several high-growth businesses outside of its core ratings business and has created wide competitive moat across its business lines. In the near-term, he believes the company’s credit ratings business can surprise to the upside, driven by record US investment grade issuances. His 2Q revenue estimate is 5% above FactSet consensus, as he believes the market is under-appreciating Fed actions which boosted monthly US IG issuances to a record $305bn/$268bn/$187bn in April/May/June, versus averaging only ~$100bn over the past 5yrs. Longer term, he expects the company’s Indices business to benefit from a secular shift to passive asset management, the Market Intelligence business to deliver market share gains and the Platts energy business to grow consistently, despite oil price volatility, given its essential role in energy price discovery. Additionally, he believes permanent cost savings associated with the coronavirus pandemic upsized from earlier $35mn to $40-55mn now (announced during 1Q) and the company’s $100mn 3-year cost reduction program is on track to generate $120mn in savings by the end of 2020. SPGI options implied move for the upcoming earnings is +/-4%, below comparable levels ahead of prior earnings. Option prices have declined to pre-COVID levels, even as the stock continues to realize high daily volatility; one month implied volatility of 30 is only in-line with realized, despite the upcoming report. Options market sentiment is bearish, with one month normalized put call skew in its 66th percentile relative to the past year, implying calls are inexpensive relative to puts. We recommend investors position for upside on earnings with long SPGI Aug-20 $357.50 calls recently offered at $12.10 (3.4%, stock $356.45). Call buyers risk losing premium paid if the stock closes below strike price on expiration. Trade Update: We initiated four new recommendations to buy options in Energy stocks in our note "Options market positioning ahead of 2Q20 Majors & Refining earnings", published on July 22, 2020. We closed our recommendations to buy DOV and PEP calls at gains, while recommendations to buy BK and STT calls expired at losses, between publications. Today, we close our recommendation to sell CNQ puts, at a gain. Source: Goldman Sachs Global Investment Research, Thomson Reuters Full trade ideas references with risks: CNQ, HFC, MPC, XOM (22-Jul) ATUS, DOV, PH (09-Jul) BK, CMG, STT (2-Jul) AMGN, PEP (25-Jun) CNQ (03-Apr) Definitions: Add to these trade recommendations: These are open trade ideas where we think there remains a good opportunity for investors to add additional investments. We believe the trade is still attractive, the majority of the catalysts have not yet happened and there is still a significant portion of the time to expiration. Hold these trade recommendations: These are open trade ideas where we think the risk/reward on the trade is still favorable; we recommend that investors who hold the position continue to do so. We would not recommend making new investments for one of the following reasons: (1) many of the key catalysts have passed, (2) the trade has moved significantly towards our view, or (3) there is not enough time before expiration to put on a fresh trade. Close these trades: With this report, we close our recommendations on these trade ideas for one of the following reasons: (1) the major catalysts have passed, (2) the fundamental thesis has changed, or (3) the trade has already moved to our view. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.
Is this better for people writing the calls or buying? I can still see some wide spreads for famous names so maybe options still aren't liquid enough!