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As the Market is on the Edge, Options Prices Are Rising. Here's How You Can Take Advantage of It

April 15, 2024
minute read

Options premiums are on the rise, presenting an opportunity to generate income through a covered call options strategy. We'll explore this strategy in the context of Domino's Pizza, a company that has delivered impressive returns of over 20% year-to-date.

Recent events have sparked concerns in the market. First, the release of the consumer price index inflation data revealed higher-than-expected inflation figures, causing apprehension among investors. Despite hopes that inflation would ease in March after initial adjustments at the beginning of the year, the data showed persistent inflationary pressures. This could delay anticipated rate cuts by the Federal Reserve, which is generally unfavorable for risk assets.

In response to these events, the S&P 500 experienced a 1.56% decline for the week, while the CBOE Volatility Index (VIX), known as the "Fear Index," rose to 17.3, its highest weekly close of the year. This increase in volatility raises questions about whether the market downturn presents a buying opportunity.

Warren Buffett's adage, "Be greedy when others are fearful," offers guidance, but the extent of fear in the market is subjective. Although the VIX reached 17.3, which may seem elevated, historical data suggests it's not exceptionally high. The VIX's current level places it around the 48th percentile, indicating that it's been higher or lower about half the time.

Given the modest decline in the S&P 500 and the relatively average level of the VIX, it's not yet clear if this is a definitive buying opportunity. However, higher options premiums provide an opportunity for option sellers to generate income.

Domino's Pizza has seen significant growth since its lows in October 2023, appreciating by nearly 50%. Despite trading at above-average multiples, the company's franchise model has generated steady free cash flow. Analysts anticipate low-to-mid-single-digit earnings growth in the first quarter, suggesting a potential slowdown in rapid price appreciation.

For investors holding shares of Domino's Pizza, selling covered calls could be a strategy to generate income while retaining ownership of the stock. For example, selling the May $540 strike call option could yield a standstill income of over 1% of the current stock price. This strike price allows for significant upside participation if the stock rallies, which is possible given the company's upcoming earnings report.

In summary, while market conditions may not yet signal a definitive buying opportunity, higher options premiums provide opportunities for income generation. Selling covered calls on stocks like Domino's Pizza could be a strategy to consider for investors seeking to capitalize on these premiums while maintaining exposure to potential stock appreciation.

Cathy Hills
Associate Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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