Each bull market goes through the stages of pessimism, optimism and euphoria. Once the market reaches the euphoria stage, interesting things might start to pop up. For the current bull market, crypto is the topic that has garnered the most attention. Here are some recent crypto-related storylines:
- Crypto.com signed the largest U.S. venue naming-rights deal, agreeing to pay $700 million over 20 years to change the name of the Staples Center in Los Angeles to Crypto.com Arena.
- The Miami mayor will take his salary in bitcoins. MiamiCoin was also launched, followed soon after by NYCCoin.
- Digital artist Beeple sold a non-fungible token (NFT) of his work for $69 million in March 2021, making him one of the top three most valuable living artists. The previous month, an NFT he had originally sold for approximately $67,000 in October 2020 was resold for $6.6 million.
- Crypto-related fraud has become rampant. Promoters have issued a cryptocurrency billed as “The One Token That Rules Them All” without the permission of the estate of J.R.R. Tolkien. There was also a Squid Game coin that vanished in less than a month, with its creators pocketing about $3.4 million from investors.
These are signs of speculative excess.
We have talked about the record call-option buying from retail investors. This week’s chart shows the impact of those buying flows. Usually, you would expect the implied volatility to move higher from left to right, because there is more demand for equity downside protection. We did see this pattern for the S&P 500 and Nasdaq 100 Indices. However, for popular meme stocks, the pattern no longer holds. Retail investors are buying so many call options that volatility is almost the same for call and put options.
This activity has created some trading opportunities. For investors with cash on the sidelines, it may be attractive to sell a three-month 10%-15% out-of-the-money (OTM) put, and use the proceeds to buy 5%-10% OTM calls or call spreads. The steep volatility difference between call and put on the index level makes this trade attractive. Investors can still gain upside exposure in the market but will only buy when the market is down 10%-15%. For investors who are holding those popular individual stocks, covered calls may make sense now given the elevated call option price.
Key Takeaway
At this stage of the bull market, risk is elevated in either direction. Option strategies may offer a good way to manage the risk. Recent market rallies have been narrow. Watch the performance of profitless growth stocks and crypto for signs that the market is changing.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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