Alpha Letter is a newsletter that gives readers investing ideas across different asset classes and strategies. You’re currently subscribed to the free version, which includes ideas that should just be viewed as starting points for your own research. To get out in-depth analysis on stocks we recommend, subscribe to our premium newsletter here. We recently published out top idea for May. Please see it here.
In this edition of the Alpha Letter, we cover:
Stocks & Options: What is implied volatility, and how do you trade it?
Real Estate: Home prices reached all-time highs in March. Should investors buy?
Every so often I like to run a scan for options with the highest implied volatility (IV). While extremely high IV is usually very risky to trade on, but on the long and short side, it’s interesting to see which names have IV and why.
If you’re not familiar with IV, I will explain shortly. I’ll also tell you why it’s usually not a good idea to trade options with extremely high IV, either on the long or short side, unless you really know what you’re doing.
While running the “IV Code Red - Calls Scan” on the vigtec Options Matrix (Get a free trial here), one name pops up several times: VXRT.
VXRT is Vaxart, Inc, a biotech company based in San Francisco. It was up 17% on Friday and 89% during last week’s trading. Vaxart is valuable because it’s working on oral vaccines for people who don’t like needles. Vaxart is up recently partly on speculation that its oral vaccine approach could become widely-available, even for the Covid vaccine.
Implied volatility for many of VXRT’s call options are in the 250% to 300% range. For context, over 100% IV for an option trading near-the-money is considered high. GameStop’s calls in late January reached as high as 1,000%, which is astronomically high. IVs that high almost never happen.
While the formula for calculating iV is pretty complicated, for now you just need to know that it basically measures how much the market expects the underlying stock to move by the time the option expires. If IV is high, the market is expecting a large move in the stock. Most index funds have extremely low IV, around 10% to 20% on options expiring soon. That’s because index funds rarely see sharp moves and are relatively stable.
When a stock is moving quickly, IV tends to go up. One useful options strategy involves selling premium. High IVs mean high premiums; in other words, people buying an option with high IV are paying extra because they are expecting a large move. You wouldn’t pay a high premium on a stock you don’t expect will move much.
Selling premium involves selling calls or puts with high IV that you think will expire worthless, or at least will be worth less at some point. A premium seller will sell out-of-the-money calls or puts to speculators hoping to cash in on some large move in the stock. A good option seller will sell those options when the chances of the option expiring worthless are good.
Option sellers need to find a sweet spot: They want to sell options with high IV in order to make a profit, but IVs being too high may suggest that it’s too risky to sell the options.
In some cases, IVs are extremely high because the stock is very likely to move sharply.
Imagine if you had seen that GameStop call options had high IVs early in the rally.
500% IV, how can I lose? You might have asked yourself.
Well, if you had sold those 500% calls, you likely would have experienced a huge loss as the stock continued to rip higher for days on end.
Let’s get back to VXRT. I would avoid selling calls on this stock. IV is extremely high, but as we’ve seen in this market, hot trends can continue on for weeks or even months without slowing down. It’s a bad strategy to assume that a rally is only done after one week, especially with all the money rotating into hot trends.
While the calls are probably too expensive to get in on at this point, I might look to buy the shares if I think this oral vaccine story still has legs. However, this case is a bit different because the stock’s success in the short-term will be decided by the results of a phase 1 trial being unveiled early this week.
Usually, I’d be monitoring VXRT to see if it gets any coverage on WallStreetBets or StockTwits. And in fact, it has gotten some attention on WSB.
Check out this thread that explains the VXRT thesis. In short, the success of the stock depends on results unveiled tomorrow and Tuesday. Trading based on clinical trial results is typically a coin flip, so don’t invest any more than you can stand to lose.
The housing market has likely never been more of a seller’s market than it is right now. The March 2021 Housing Report showed an inventory crunch as buyers are rushing to buy any and all inventory. Available inventory is down 52% year-over-year while the median listing price of $370,000 was a 15.6% increase over last year.
It may be tougher than ever to get into a home. But what about for investors? Should landlords looking to get into or expand their holdings in the single family home market get aggressive or sit back for a while?
The general formula for any rental investment is the cap rate. Your cap rate is net operating income (NOI) divided by the value of the property. Early on in an investment, it’s important to look at the cash-on-cash yield also, which is like cap rate but instead of the total property value, it only factors in the money you actually put into the property.
So the question for any rental property investor is: what kind of yield can I get for my investment?
There are two factors for rental investors to consider right now:
Are rents going up at the same rate as home prices?
Am I investing in a strong market that’s mostly bubble-proof?
If the answer is yes to both questions, property investors should likely still be interested in getting into single-family homes.
However, recent trends suggest that rents aren’t keeping up with home prices. While this chart below only factors in 1-bedroom rentals, the trend still follows for other size rentals.
This may actually be another result of the K-shaped recovery we’ve seen since the Pandemic began. Those that are well-off are doing better: their stocks portfolios are at all-time highs and the tech industry is doing great. Single family homes are assets purchased by people who are doing well, so while people who are doing well continue to do better, it makes sense that those asset prices continue to be bid up.
Advertise with us
Want access to a large group of investors? We run a large newsletter, a network of social media accounts with over 350,000 combined followers and two popular investing websites. We have taken multiple Twitter profiles viral and know what works. Feel free to reach out to set up a consultation and learn about the services we offer.