According to Janus Henderson, an ‘unusual gap’ in the options market is creating an opportunity for investors to generate higher income from individual stocks. While volatility across the broader U.S. market appears relatively subdued, shares of individual companies have been experiencing far larger swings. “Stocks have been increasingly trading on their own stories rather than moving in lockstep. Some of the largest companies in the market have moved 10%, 15%, even 20% in a single day, often with no earnings news to explain it,” said Jeremiah Buckley, a portfolio manager at Janus Henderson.
This has widened the gap between the implied volatility of individual stocks and the S&P 500, meaning investors can currently collect higher premiums by selling, or “writing,” call options on individual companies rather than on the wider index.
A covered-call strategy involves selling someone else the right to buy a stock at a predetermined price. In return, the seller receives an upfront payment known as a premium. Higher expected volatility generally translates into a larger premium.
The gap partly reflects the rise of thematic trading, according to Buckley. Flows into and out of single-stock exchange-traded funds, semiconductor baskets, and other narrowly focused products have amplified moves in individual companies.
Janus Henderson noted that active managers can also adjust strike prices, expiration dates, and the proportion of each holding covered by options as market conditions shift.
