(By
Philip Guziec, CFA)
We
use Morningstar's proprietary industry-level data to find sectors and
industries that are attractive for option-based investment strategies. The charts below show how much the average implied volatility
for each sector differs from its trailing-three-month and
trailing-one-year averages for U.S.-listed equity options (vertical
bars, indexed on the right-hand scale), the change in implied volatility
from week to week (dark blue line, indexed on the left-hand scale), the
implied correlations of small- and large-cap stocks, and the
relationship of implied volatility across size and value stocks.
We think depressed implied volatility in
financial-services companies combined with depressed valuations could
make these names ripe for buying bullish.
Source: Morningstar Option Research
We believe that the following companies provide the best opportunities for buy bullish exposure.
Charles Schwab (SCHW)
Based in San Francisco,
Charles Schwab operates in the brokerage, banking, and asset-management
businesses. The company runs a large network of brick-and-mortar
brokerage branch offices and a well-established online investing
website. It also operates a bank and a proprietary mutual-fund business.
Additionally, Schwab offers services to independent investment
advisors. In our view, Charles Schwab is in a good position to post
solid profit growth once interest rates begin to rise. The company has
recently managed to sustain its interest revenue by assiduously growing
assets, but the true earnings power of this franchise will not kick in
until the Federal Reserve brings the low-rate era to an end. To be sure,
we think the way that Schwab has managed to profitably survive the
current period underscores Schwab's operational discipline, which should
pay off more handsomely in time. Given the uncertainty around the rate
outlook, we do caution investors to be patient. Additionally, we like
Schwab's recent acquisition of optionsXpress because it will give the
company an opportunity to grow its presence among a nicely profitable
customer set, options investors.