7 Options Trades to Profit From a Falling Market
While bulletproof dividend stocks genuinely offer a higher probability of protection (over the long run) against an incoming market downcycle, investors growing in their sophistication may want to consider options trades. As derivatives of the underlying securities, options provide incredible flexibility that you can’t get with buy-and-hold dynamics.
For one thing, bulletproof dividend payers probably won’t protect investors tactically. We don’t have to look back to the Great Depression to recognize this dynamic. During the onset of the COVID-19 crisis in the U.S., almost the entire market – except for specifically relevant enterprises like telehealth providers – suffered severe volatility. If you want tactical returns, you should consider options trades.
Also, engaging in the derivative market doesn’t necessarily invoke hatred toward the targeted entity. Consider a storied sports franchise like the New York Yankees. The Yankees have zero problems sending down underperformers to the minor leagues. They have a tradition of winning, not whining. So it is with the below options trades: they’re enabling you to make the best out of a bad situation.
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Big Lots (BIG)
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If you’ve been paying attention to the challenges facing the consumer economy, the volatility in Big Lots (NYSE:BIG) shouldn’t come as a surprise. With soaring inflation combined with rising borrowing costs crimping purchasing power, people are keeping their wallets closed until absolutely necessary. Sadly, BIG stock has suffered a disproportionate impact, losing nearly 71% of equity value.
Of course, that raises the prospect of Big Lots offering an enticing deal for pessimistic options trades. Here, speculators probably don’t want to get cute by writing put options, which will obligate you to acquire shares should BIG fall below the listed strike price. Instead, retail traders may want to consider buying puts outright, thus making your losses predictable.
Looking at Fintel’s options flow screener – which filters exclusively for big block transactions – we see that maximum strike price sentiment has been steadily declining. For options expiring in June 2022, the maximum strike (for major trades) stood near $50. For options expiring between October through January 2025, the max strike is only $15.
Finally, analysts don’t like BIG, rating it a moderate sell. Worse yet, not a single expert states it’s a buy.
Virgin Galactic (SPCE)
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When Virgin Galactic (NYSE:SPCE) made its public market debut, anticipation ran sky-high. On paper, the underlying backdrop still appears enticing. According to McKinsey & Company, experts project that the space economy could hit $1 trillion by 2030. With Virgin featuring a market capitalization of only $602 million, taking a modest bite could yield significant gains.
However, SPCE symbolizes one of the top options trades but not for necessarily good reasons. Per Fintel’s options flow screener, sentiment has really died down. Yes, some traders are taking longshot bets as evidenced by open interest for the Jan 17 ’25 12.00 Call. However, a significant number of market participants are buying put options.
Further, several of these puts sit at rather lowly strike prices, ranging from $1 to $1.50. Keep in mind that as of last Friday’s close, SPCE finished the session at $1.64. Also, having lost 53% of equity value since the January opener, it appears most investors have given up. Unsurprisingly, analysts rate SPCE a moderate sell, breaking down as two holds and three sells.
AMC Networks (AMCX)
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When a media network launches a ravenously popular content series, it’s a double-edged sword. Just ask AMC Networks (NASDAQ:AMCX). Several years ago, the company introduced The Walking Dead, which understandably riveted audiences. However, after many a jumping of the proverbial shark followed by seemingly endless spinoff series, audiences had enough. Viewership stats have plunged, as did AMCX stock.
Unfortunately, AMC Networks just hasn’t been able to introduce another popular series to take the mantle. However, for speculators, AMCX transitioned to become one of the “top” options trades. Interestingly, throughout this year, options flow data has been extremely limited. This dynamic suggests that retail traders are largely driving the action in the derivative market.
Still, the most recent big block trade was for 1,010 bought contracts of the Nov 17 ’23 10.00 Put. With the smart money not anticipating a near-term recovery, this could be the chance for retail bears to scalp a quick return. Adding more temptation to this proposal are analysts, who rate AMCX a moderate sell. Breaking this down, one hold and three sells overwhelm the lone buy rating.
Bank of Hawaii (BOH)
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I’m probably not going to make too many friends from the great state of Hawaii. However, I’ve got to set aside emotions and look at the hard data for the Bank of Hawaii (NYSE:BOH). Obviously, this financial institution is heavily leveraged toward the local economy. And that local economy – for better or for worse – aligns with tourism.
Even before the deadly wildfires, many analysts pointed to Hawaii’s vulnerability to a global economic recession. During the Great Recession, half of the jobs lost stemmed from the tourism, transportation, retail, and services industries. Add in the devastating wildfires and you’re talking about an incredibly risky backdrop.
I’m truly sorry but Fintel’s options flow screener reports that sentiment among smart money traders is decidedly bearish. Indeed, one of the biggest options transactions involves 1,203 contracts sold of the Jan 19 ’24 55.00 Call. Basically, major traders are betting that BOH never reaches that high. While they’re waiting, they’re collecting a premium of $343,000.
Analysts also reinforce the negative options trades, rating BOH a consensus moderate sell.
Herbalife (HLF)
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A global multi-level marketing firm, Herbalife (NYSE:HLF) automatically generates controversy for its business model. Basically, members of MLMs make money either through selling the underlying product/service or recruiting downlines. The latter component is the most attractive because the upline gets a cut of all the downline revenues. However, there are only so many people you can mathematically recruit.
Now, you can research that concept on your own. For our purposes regarding options trades, speculators may be able to capitalize. Over the last five years, HLF lost nearly 75% of its equity value. And it doesn’t appear that shares will recover anytime soon. To be sure, the underlying product isn’t all that exciting and competition is fierce.
One factor that does stand out for HLF against other options trades is that bullish speculators are betting on a massive comeback by January next year. Financially, the steady erosion of the top line since end-of-year 2021 implies that the bears have the edge. So, many other traders are either selling calls or buying puts.
Notably, analysts rate HLF a moderate sell, breaking down as two holds and one sell.
Rite Aid (RAD)
Source: Ken Wolter / Shutterstock.com
A former heavyweight in the retail pharmacy industry, Rite Aid (NYSE:RAD) is holding on for dear life. And no, I’m not talking about HODL-ing. Instead, I’m referring to the face-value interpretation of the phrase. In late September, The Wall Street Journal reported that the company may close about 400 to 500 stores in bankruptcy. Put another way, it’s flirting with the inevitable.
Understandably, institutional options trades for RAD stock impose a decisively bearish tone. Sure, someone will always be willing to take the opposite side wager. However, significant volume and open interest stats have been printed, mainly for bought puts. As well, there’s a notable activity for sold calls, especially at the $1 strike price.
Oh yeah, that’s right – RAD is now a literal penny stock, closing Friday at 65 cents a pop. Due to the overwhelmingly ugly sentiment, speculators may want to consider buying puts outright. You might not want to mess with writing puts because you probably don’t want to own this hot mess. Only one analyst from Evercore ISI covers RAD. Surprise, surprise, it’s a “sell.”
Dole (DOLE)
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Easily one of the most disappointing market ideas for me, Dole (NYSE:DOLE) in a roundabout way demonstrates the importance of options trades. No matter how much confidence you may have toward a particular enterprise, unexpected market forces may collapse the trade. In such a circumstance, you want to have the flexibility to profit no matter what happens.
Fundamentally, Dole is one of the world’s largest producers of fruit and vegetables. Therefore, it should benefit from the trade-down effect. Basically, consumers may eschew the pricier option of eating out at restaurants or ordering takeout in favor of home cooking. In that scenario, DOLE should swing higher. While it’s up for the year, DOLE has also lost more than 10% of equity value in the trailing month.
Interestingly, for big block options expiring in August, an apparently bullish trader bought a large volume of $12.50 call options. Subsequently, DOLE faded badly in the open market. Now, major options expiring in November feature a much smaller volume.
Bank of America analysts see DOLE losing air, assigning a “sell” rating with a $10 downside target. Still, because of the relevance, I wouldn’t be opposed to selling puts at a comfortably low enough price.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.
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