Philip Guziec, CFA)
sector spotlight highlights industrial names, where rising volatility
could provide covered call or cash-secured put opportunities.
use Morningstar's proprietary industry-level data to find sectors and
industries attractive for option-based investment strategies. The
charts at the bottom show much of the average implied volatility for
each sector differs from its trailing three-month average (vertical
bars, indexed on left-hand scale), the change in implied volatility from
week to week (dark blue line, indexed on the right-hand scale), and the
history of implied volatility for the energy industry.
Sector volatility rose broadly over the week, with the
exception of utilities. Industrials and consumer cyclical stocks showed
the most elevated uncertainty relative to the trailing quarter.
and consumer cyclical names showed the most elevated uncertainty
relative to the trailing quarter, with a broad rise in uncertainty
leaving only basic materials and utility names below their
trailing-quarter average. As volatility is rising in industrial names,
it might be an opportunity to sell downside exposure to undervalued
shares. Our sector standout chart below shows how much the average
implied volatility for each sector differs from its trailing average.
Vertical bars (indexed on left-hand scale) show present sector
volatilities with respect to historical averages. The dark blue line
(indexed on the right-hand scale) shows weekly changes.
For those of you looking to generate income from rising
volatility by selling downside exposure on industrials companies,
you could sell bullish covered calls and cash-secured put options in the
Morningstar's best bullish ideas in industrials are General Electric (GE) and health-care staffing firm, which we consider an industrial function, AMN Healthcare Services (AHS).
General Electric positions itself to be a leader in all markets in
which it competes. After shedding underperforming businesses during the
past few years, the firm has energy infrastructure square in its sights.
We believe GE will emerge as a leader in the power infrastructure
market, which will be the backbone for the firm's growth. Exiting the
recession, we think CEO Jeff Immelt finally has the portfolio he wants.
He essentially put the company on a diet, trimming the business to an
impressive core portfolio. NBC Universal should move out of the picture
by year's end, leaving the energy, health-care, and aviation pieces
All of these are wide-moat franchises, in our opinion.