Home Improvement Stock Falls Lower on Downgrade

The shares of Lowe’s Company Inc (NYSE:LOW) are down 1.2% at $161.69, after Oppenheimer downgraded the stock from “outperform” to “perform,” …

The shares of Lowe’s Company Inc (NYSE:LOW) are down 1.2% at $161.69, after Oppenheimer downgraded the stock from “outperform” to “perform,” with a price-target cut to $180 from $185. The firm downgraded sector peer Home Depot (HD) as well, noting that home improvement stores’ recent outsized gains could reflect a demand pull going forward. With that being said, the analyst in coverage sees modest upside for the shares in the long term.

On the chats, LOW has been repeatedly rejected by the $171 level as of late, but not before acquiring a fresh Sept. 16 all-time high of $171.72. Now seeing pressure from the 20-day moving average, the equity is on track for its first monthly loss in six, though it does remain up 35% year-to-date.

Coming into today, 18 analysts carry a “buy” or better rating on Lowe’s stock, with the remaining three at a lukewarm “hold.” Meanwhile, the 12-month consensus price target of $181.31 is a 10.7% premium to current levels, indicating an overall sense of optimism from covering firms.

The options pits are also looking overwhelmingly bullish. LOW’s 50-day call/put volume ratio of 2.59 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands higher than all other readings in its annual range. This means long calls are being picked up at their fastest rate in a year.

Options look like a good way to go when weighing in on Lowe’s stock as well, as it is currently seeing attractively priced premiums. The stock’s Schaeffer’s Volatility Index (SVI) of 33% sits higher than 14% of readings in its annual range, suggesting short-term options are pricing in relatively low volatility expectations.

Tech Stocks Slide After a Summer-Long Rally. But This Is No Dot-Com Bubble.

As reported by several media outlets, SoftBank Group, the big Japanese conglomerate, appeared to be a major buyer of options on megacap tech …

The result was the erasure of $1.7 trillion of paper profits in the U.S. stock market in the final two days of the week, according to Wilshire Associates’ tally. But to put that in perspective, investors were still up $13.1 trillion, or 55.7%, from the lows of March 23 and $2.2 trillion, or 6.3%, since the end of 2019.


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Even with a recovery from their lows on Friday, the major averages had their worst week since late June, with the S&P 500 index off 2.3% and the Dow Jones Industrial Average off 1.8%. The technology-dominated Nasdaq Composite, at the center of the market’s turbulence, slipped 3.3%, its worst week since late March.

As for what roiled the market, the suspects fingered most often were options players, both big and small. As reported by several media outlets, SoftBank Group (ticker: 9984.Japan), the big Japanese conglomerate, appeared to be a major buyer of options on megacap tech stocks, giving it the right to acquire $50 billion worth of the underlying shares.

At the same time, relatively small punters also have been actively trading options, especially short-dated, out-of-the-money calls, which effectively give them a cheap “lottery ticket” to play the bull market in the giant tech stocks that have led the market’s advance, observes Peter Tchir, the derivatives and credit maven at Academy Securities. While he concedes that the capital controlled by these speculators is small relative to the market, “in a world where volumes are distorted by the frantic trading of [algorithmic-based accounts], any real order flow has a surprisingly large impact on prices,” he adds in a client note.

After the long run in tech stocks, in which some have doubled or more, both individual and institutional investors have shifted to buying call options, where their loss exposure is limited to the premium they pay for the contract, explains Mark Haefele, chief investment officer for global wealth management for UBS.

Options dealers, who have sold calls to traders, are forced to hedge their exposure. That would mean buying underlying shares as their prices rise, and selling as the shares fall. All of which can exacerbate price swings, as happened on Thursday, Haefele writes in a client note. (Colleague Al Root explains the real nitty-gritty of the options trade, complete with Greek letters describing the math that makes derivatives vastly more intellectually challenging than betting on sports.)

Despite the drop in the big tech stocks, this doesn’t seem like the bursting of the dot-com bubble in 2000. As Evercore ISI points out, a perfect storm had developed then: Oil prices had doubled, and the Federal Reserve raised its federal-funds rate target sharply, by 1.75 percentage points, which inverted the yield curve, a classic sign of tight money and a future downturn. Now, by contrast, the Fed has pushed the funds rate to near zero and expanded its balance sheet by nearly 50%, while oil prices remain depressed.

Capital Economics’ Jonas Goltermann points to another difference: “Unlike in 2000, the largest tech firms today are highly profitable, and their valuations, while punchy, don’t look so obviously unsustainable. So while this correction may well have further to run, and we continue to think that tech stocks will fare less well than most other sectors as the economic recovery continues, we don’t expect that a collapse in tech stocks will drag down the entire market in the way that it did in 2000-02.”

Corporate insiders apparently are not waiting to cash out, however. The Financial Times reports that U.S. executives took advantage of the market’s rally to sell $6.7 billion of their own companies’ shares in August, the biggest dollar amount since November 2015. As my illustrious predecessor in this space, Alan Abelson, was wont to observe, there are many reasons to sell a stock; expecting it to rise isn’t one of them.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

Traders Buy High Volume of Put Options on Best Buy (NYSE:BBY)

Vanguard Group Inc. now owns 29,346,566 shares of the technology retailer’s stock valued at $2,561,075,000 after acquiring an additional 1,662,640 …

Best Buy logoBest Buy Co Inc (NYSE:BBY) was the target of unusually large options trading on Monday. Traders bought 20,300 put options on the company. This represents an increase of 968% compared to the typical daily volume of 1,900 put options.

A number of equities research analysts recently weighed in on BBY shares. Nomura decreased their target price on Best Buy from $85.00 to $84.00 and set a “neutral” rating on the stock in a research report on Friday, May 22nd. Nomura Instinet decreased their target price on Best Buy from $85.00 to $84.00 and set a “neutral” rating on the stock in a research report on Friday, May 22nd. Wells Fargo & Co lifted their target price on Best Buy from $80.00 to $92.00 and gave the stock an “equal weight” rating in a research report on Wednesday, July 22nd. UBS Group lifted their price objective on Best Buy from $74.00 to $80.00 and gave the company a “neutral” rating in a report on Monday, May 18th. Finally, Guggenheim raised Best Buy to a “buy” rating in a report on Thursday, July 16th. Seven analysts have rated the stock with a hold rating, fifteen have given a buy rating and one has assigned a strong buy rating to the company. The company presently has a consensus rating of “Buy” and a consensus price target of $97.05.

In other news, major shareholder Richard M. Schulze sold 290,796 shares of Best Buy stock in a transaction dated Friday, June 26th. The stock was sold at an average price of $85.59, for a total value of $24,889,229.64. The transaction was disclosed in a document filed with the SEC, which can be accessed through this hyperlink. Also, insider Whitney L. Alexander sold 9,000 shares of Best Buy stock in a transaction dated Thursday, July 23rd. The stock was sold at an average price of $98.42, for a total value of $885,780.00. The disclosure for this sale can be found here. Insiders sold 920,549 shares of company stock worth $77,977,061 over the last quarter. 0.64% of the stock is currently owned by corporate insiders.

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Several hedge funds have recently made changes to their positions in BBY. Vanguard Group Inc. raised its holdings in Best Buy by 6.0% in the 2nd quarter. Vanguard Group Inc. now owns 29,346,566 shares of the technology retailer’s stock valued at $2,561,075,000 after acquiring an additional 1,662,640 shares during the period. APG Asset Management N.V. raised its holdings in Best Buy by 65.7% in the 1st quarter. APG Asset Management N.V. now owns 3,221,797 shares of the technology retailer’s stock valued at $203,893,000 after acquiring an additional 1,277,308 shares during the period. AQR Capital Management LLC raised its holdings in Best Buy by 34.2% in the 1st quarter. AQR Capital Management LLC now owns 4,044,130 shares of the technology retailer’s stock valued at $230,516,000 after acquiring an additional 1,029,966 shares during the period. Charles Schwab Investment Management Inc. raised its holdings in Best Buy by 46.5% in the 2nd quarter. Charles Schwab Investment Management Inc. now owns 3,172,487 shares of the technology retailer’s stock valued at $276,863,000 after acquiring an additional 1,007,028 shares during the period. Finally, Janus Henderson Group PLC increased its holdings in shares of Best Buy by 26.6% during the first quarter. Janus Henderson Group PLC now owns 3,899,726 shares of the technology retailer’s stock worth $222,287,000 after purchasing an additional 819,725 shares during the period. 77.43% of the stock is owned by institutional investors.

Shares of BBY stock opened at $117.37 on Tuesday. Best Buy has a 12-month low of $48.10 and a 12-month high of $119.48. The firm has a market capitalization of $29.36 billion, a price-to-earnings ratio of 19.72, a price-to-earnings-growth ratio of 2.34 and a beta of 1.50. The company has a quick ratio of 0.57, a current ratio of 1.02 and a debt-to-equity ratio of 0.18. The firm has a fifty day moving average of $97.73 and a 200-day moving average of $81.01.

Best Buy Company Profile

Best Buy Co, Inc operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico. The company operates in two segments, Domestic and International. Its stores provide Computing and Mobile Phones, such as computing and peripherals, e-readers, networking products, tablets, and wearables, as well as mobile phones comprising related mobile network carrier commissions; consumer electronics, including digital imaging, health and fitness, home theater, portable audio, and smart home products; and entertainment products consisting of drones, movies, music, and toys, as well as gaming hardware and software, and virtual reality and other software products.

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12 Stocks Corporate Insiders are Abandoning

An insider trade occurs when a corporate executive (such as a CEO, CFO or COO) that has non-public information about a company buys or sells shares of that company’s stock. Company insiders are required by law to regularly report their stock purchases and sales to the SEC.

Tracking a company’s insider trades is a metric that can be used to identify the direction that the company’s executives believes that the company is headed. If a number of insiders sell shares of their company, they may believe that the company will have weak future earnings and that the share price will decline in the near future.

For example, if Microsoft’s CEO, CFO and COO all recently sold shares of Microsoft stock, that would be an indication that there could be unreported news that may negatively effect Microsoft’s stock price in the near future.

This slideshow lists the 12 companies that have had the highest levels of insider buying within the last 180 days.

View the “12 Stocks Corporate Insiders are Abandoning”.

Fiat Chrysler Stock Revs Up with Bull Signal Flashing

The FCAU options pits have seen a renewed focus on puts lately. This is per the stock’s 50-day put/call volume ratio of 0.95 at the International Securities …

The shares of Fiat Chrysler Automobiles (NYSE:FCAU) are rising this afternoon, up 2.8% at $11.30 at last check, although the exact catalyst is unknown. What is known is that prior to today, the automobile stock had pulled back to a trendline that, if past is precedent, could send FCAU higher in the coming month.

Specifically, Fiat Chrysler stock just came within one standard deviation of its 40-day moving average. According to data from Schaeffer’s Senior Quantitative Analyst Rocky White, two similar signals have occurred during the past three years. FCAU was higher one month after both of these signals, averaging a one-month return of 10.8%. A similar move, from the security’s current perch, would put the equity at $12.52 — a level FCAU hasn’t reached since just before the broader market’s mid-March pullback.

FCAU Chart August 24FCAU Chart August 24
FCAU Chart August 24

The FCAU options pits have seen a renewed focus on puts lately. This is per the stock’s 50-day put/call volume ratio of 0.95 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). While this means calls outnumber puts on an absolute basis, that ratio stands higher than 90% of readings from the past year, which indicates a much healthier appetite for long puts at the moment.

Those looking to bet on Fiat Chrysler stock’s next move should consider options. The equity’s Schaeffer’s Volatility Index (SVI) of 32% stands higher than just 3% of all other readings from the past 12 months. This implies options traders have been pricing in relatively low volatility expectations on FCAU.

Portfolio Margin Model

In this paper, we examine an approach to analyzing the data to evaluate the performance of portfolio margin requirements from a different perspective. How can we help you increase your returns, and how does this approach work for option traders? [Sources: 0, 17]

We construct an optimization model with a portfolio opportunity that takes margin requirements into account and demonstrates that the corresponding portfolio opportunities are convex, which is the DEA used to evaluate the performance of the portfolio margin requirement. We see that riskier asset margins that are discounted are higher than cash margins, and that the portfolios that set option 6 are therefore formal. By proving that it is much larger, we conclude that our limit-derived DEA model can approximate the exact limit of portfolio margin requirements, as this coincides with the constraints of our margin optimization models [4]. We prove this with the same method as in the previous work, except that we are able to evaluate the performance of the portfolios with the required margin. [Sources: 17]

The ability to upgrade the margin account in a portfolio risk model is incredibly powerful, but portfolio margins are not for everyone. You can write off margins at a large premium, which does not reduce the fact that your margin requirement is still 50% of the share price, but still helps meet it. If you have enough assets to qualify, you can get away with a margin of only 10% or even less. [Sources: 0, 16]

The introduction of a safety margin for portfolios can only be achieved in favourable market conditions and when the cannonballs are falling. As with any investment, your decision to include stocks, indices and futures in your portfolio should be based on your personal goals and your risk tolerance. If you know you cannot move forward without hedging your futures options, consider alternative methods of portfolio risk management. [Sources: 1, 3]

While you are generally focused on growth and income, the safety margin of your portfolio should be reserved for capital preservation over the long term. [Sources: 5]

To get your long-term investment goals on track, you need to finance your purchases by margin. A margin call occurs when the market value of a security in your portfolio drops significantly, which in turn reduces your borrowing. If you do not respond to the margin calls, your broker will sell enough of the securities that were bought on margin, and then buy back the short calls to lower your margin ratio. I assume that the initial margin limit is 30% (provided your securities account is marginal), while the margin maintenance requirement in this case is $30.00. [Sources: 7, 12, 13, 15]

The portfolio margin in this case requires you to hold $2,785.00, so I’ll stress Amazon, which will test how much money you could lose at this level. If you use portfolio margin, you can use the lower end of the spectrum by paying into the margin account of your portfolio. [Sources: 0]

The original margin is the margin variation based on the market value of the trade, and as such it is a risk – a calculation based on risk. The SPAN margin uses the statistical value-to-risk (VAR) approach to determine the initial margins. [Sources: 6, 10]

This calculation can then be used to determine how many forward contracts should be sold to cover the portfolio in full. The additional margin is necessary if you feel that your portfolio carries too much risk compared to the capital of your clearing members. This is calculated by calling it a portfolio and sets a value for the company that holds it. As the name suggests, there is more leverage available, although the amount depends heavily on the composition of the portfolios. [Sources: 3, 4, 9]

This is especially true when you consider how far the portfolio must sink before it receives a margin call or becomes a forced seller. The table above shows how much time the portfolios need to get a margin call, depending on how leveraged you are. For example, if your net short position on Strike X is 10% and you have a call put of 20%, you would need to add the margin calculation to your portfolio. [Sources: 2, 8]

The other component is commonly referred to as the margin of variation, i.e. the level of collateral required to cover credit risk associated with the entire portfolio transactions between the trading parties. When using a portfolio margin account, it is found that about half the margin is used in trading equities compared to traditional margin accounts. As the margin value decreases due to maintenance margins, investors receive a margin call asking them to provide more collateral. With portfolio margins, the broker evaluates what happens on an individual basis, unlike a traditional margin account. [Sources: 0, 11, 14]

A portfolio with a beta of 1 indicates that the movement of the portfolio value is exactly proportional to the index over time. Precise hedging is necessary because the value changes not only in the short term, but also in the long term. [Sources: 3]

Sources:

(0): https://optionalpha.com/portfolio-margin-19433.html

(1): https://www.etfguide.com/4-things-to-understand-about-your-portfolios-margin-of-safety/

(2): https://seekingalpha.com/article/4241989-3-rules-for-using-margin-safely-and-profitably

(3): https://www.schwab.com/resource-center/insights/content/portfolio-risk-management

(4): https://opengamma.com/insights/wikipedia-gets-wrong/

(5): https://finance.yahoo.com/news/still-investing-without-margin-safety-230244599.html

(6): https://blog.earn2trade.com/futures-margin-explained/

(7): https://thismatter.com/money/stocks/margin.htm

(8): https://www.deribit.com/pages/docs/portfoliomargin

(9): https://ibkr.info/article/2085

(10): https://securities.bnpparibas.com/insights/initial-margin-derivatives.html

(11): https://www.globalcapital.com/article/k6b8sq14t8nk/initial-margin-for-otc-derivatives

(12): https://www.m1finance.com/blog/how-margin-loans-make-your-money-work-harder/

(13): https://www.westpac.com.au/personal-banking/investments/the-share-market/how-a-margin-loan-works/

(14): http://blog.aaii.com/margin-a-portfolio-lever-for-buying-and-selling-stock/?print=print

(15): https://www.fidelity.com/learning-center/trading-investing/trading/margin-borrowing

(16): https://financhill.com/blog/investing/covered-call-writing-margin

(17): https://www.hindawi.com/journals/mpe/2014/618706/