Schaeffer's Market Mashup Podcast on Sector Trends & Trades

We sit down with Jermal Chandler of Cboe Global Markets

Managing Editor
Sep 10, 2020 at 10:00 AM
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On the latest Market Mashup, Patrick Martin sits down with Cboe Global Markets' Jermal Chandler, one of the Senior Instructors at the Options Institute and the Senior Instructor of Market Insights. Patrick and Jermal chop it up about the COVID-19 impact on various sectors including retail, real estate, and travel (2:39). Jermal also breaks down what Select Sector Indices can do to a trading portfolio (13:10), plus how its volatility stacks up with the S&P 500 (15:35). They close with a look at what the November 2020 election can do to sector performance and dispersion (20:56).

Transcript of Schaeffer's Market Mashup Podcast: September, 2020

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mashup. I am very excited about today. Please welcome our latest guest from CBOE global markets, Jermal Chandler, senior instructor at the Options Institute. Jermal, how are we doing today?

Jermal Chandler: Doing great, man. Thanks for having me on, I really appreciate it.

Patrick: Yeah, likewise, likewise, before we dive in one, congratulations on Chicago's epic weekend of sports, you can, it's a laundry list of accomplishments you guys had. So tip of the hat there, let's just start with your background on your career and your current position, you know, give us some information there.

Jermal Chandler: So before I came into the industry, I was actually a chemist and engineer for about 10 years. So you know, I have a couple of different publications from, you know, through what seems like a century ago. And that was my background prior to coming into the industry 15 years ago; I worked at Prop Trading firm here in Chicago. Which there’s abundance of those here? So I worked there for almost 10 years and then I had a stint in the regulatory side of the business as well for a couple of years there. And that's actually how I started at CBOE in our regulatory group. And now I've been at the CBOE and the options Institute, which is the educational arm of the company for almost three years now


Patrick: What I like so far is I've interviewed, I think now four people from CBOE is everyone has bounced around within the overarching company. Like there, they have experience in so many different fields. It's fascinating how they're so well-rounded, and I think that applies to you as well.

Jermal Chandler: Yeah, I think, you know, we've tried to get together, an eclectic group of people with years of understanding in different areas and I think it shows.

Patrick: Yeah, absolutely, absolutely. So well, we're going to talk about the elephant in the room, really the COVID-19 crisis it's created a devastating impact on every economic sector. Drastic measures are being taken to limit it to our wider economy, but it's no secret that the US as with a lot of other countries in the world, it's facing a long road back to a full recovery. So let's start back in the beginning, back in February or March. However you want to look at it, which industries and in the larger sectors that they were a part of were most heavily impacted at the onset of this pandemic?

Jermal Chandler: Well, that's a, you know, it's an interesting starting point, Patrick, because there's a couple well, you know, we can start at the travel and leisure. I mean the entire travel industry has been affected as people quarantined in their homes at the beginning of the pandemic. Hotel occupancy rates are down over 50% year over year. When you look at the [unclear 03:10] data, cruises were shut down in mid-March and initially had no sale orders until July. That was eventually extended until this month, September. Airline revenue collapsed as passengers canceled trips and countries imposed bands. I mean, airline stocks plunged on bankruptcy fears at the beginning of this whole thing. Even Warren buffet bailed on airlines that should tell you something. Now we did have the cares act, which provided a $50 billion package for payroll grants and loans that help prevent the widespread of layoffs until at least October. But even still, I mean year over year PSA checkpoint numbers show total traveler through PUT at US airports is only 30% what it was year ago.

I mean, simply put people aren't flying that much. And as a result of planes not flying, one would imagine there's not a whole lot of refueling, which gets us into energy, oil investors are not likely soon forget the first time in history when they saw oil prices go below zero. And COVID-19 forced lockdowns around the world and destroyed demand for oil products like gasoline and jet fuel. BP recently is on record as saying the Arab oil demand growth is over and oil consumption may never return to the pre pandemic levels. I mean, that's pretty interesting coming from a huge company like BP. 

Patrick: Very Impactful.

Jermal Chandler: And then there's, like a ton of bankruptcies in the sector. When you look at Chesapeake and Whiting, Chesapeake Energy and 04:29 petroleum are two well-known ones. It's also interesting that at this time we're witnessing this surge in electric vehicle production. Is that a coincidence? I don't know. So it's just a tough time for the whole oil and gas industry overall. Then when you look at restaurants, I mean, they were affected in a unique way from job losses to supply chain shortages, and they had a rough go of it. Year over year, seated walk-in comparisons at diners in the US are down 35 to 45% according to data from open table. And so even as restaurants begin to reopen seating limits became a new challenge, right? 

Like all of a sudden you have to pay attention to the weather if you're a restaurant owner, because you have to make sure that it's not going to rain that day. Rain is just going to kill your profits for that. Now some of the larger restaurants are starting to change with consumer habits. And that's the interesting thing about this pandemic. We see deliveries becoming a huge prominent part of our society. Customers are downloading, you know, not only just delivery apps like Door dash and Grub hub, but they're also downloading actual restaurant apps. You know, like Chick-fil-A has, their app has been one of the most downloaded on the Apple app store from what I understand. So, and then you're starting to hear about fast food companies recently are radically redesigning their restaurants because nobody's eating in there. 

So now you're just having to make more situations for drive-through to be more viable. And then finally retail. Now retail is broad, but when we first talked about this at the beginning with retail, it was Walmart, Target, Costco, they were seeing a huge boom at the beginning of the pandemic because people were flocking there for all the essential stuff like toilet paper and bleach. Eventually you could throw a Best Buy in there because it became apparent that we were going to be in the situation for some time and people needed more tech to work and learn from home. But then there's the retail where you're talking about people buying clothes, right? And things have drastically changed there because people are no longer wearing upscale attire for work as much people are starting to wear athleisure. So when you look at things like JC penny and Neiman Marcus and Lord and Taylor, all of these stores that were sort of dying a slow death anyway. They finally went bankrupt and consumers are largely buying online now. So in that, but we just talked about was retail, travel and restaurants, which is the consumer discretionary sector. And then oil of course, is the energy sector.

Patrick: Yeah, I feel like you hit them all right on the head and a couple of points that I wanted to kind of expand on there. You mentioned the airlines, we wrote an article here at Schaffer's a couple of weeks back that mentioned the TSA travel figures. So on Sunday, August 9th, the agency saw 800,000 people at airport and checkpoints, which was its first reading above 800,000 since March 17. And at first glance you think, wow, that's great everyone's kind of biting the bullet and taking the calculated risk. But then when you look at what that number is compared to last year, it's not even half. So it's such a long road to recovery, so on that note, you know, what sectors appear to be on that road to recovery, even if only slightly like the airline one?

Jermal Chandler: You know I would have to say the real estate sector; real estate is down 8% this year. And we've often heard about at the outside of the pandemic, how folks were able to put their mortgage payments on hold. So that was an interesting time period, right? Now this also happened for companies as well, whether they rented space at a shopping mall or a strip mall, we were, they were, we were hearing about places putting their mortgage payments on hold. But, and you know, you also see commercial real estate seems to be in trouble for the time being, as we've seen this exit out of cities for buyers fears and some social unrest in some situations overall. But however homebuyer interest has blossomed as ultra-low interest rates have made it attractive. There's also a few statistics that point to strengthen the housing market. I mean, just a couple of weeks ago, the US census bureau reported new home sales search, 14% on a month to month basis in July. And then the comments department also showed that the nation's home ownership rate hit 68% in the second quarter, which is the highest level since the third quarter of 2008. So I think overall real estate has always been pretty cyclical and I wouldn't be surprised to see it get going again.

Patrick: Yeah, I can give you a personal anecdote. I looked around, my dad visited me in Cincinnati in June, and we looked at a place to buy here in Cincinnati. It was an option that was previously off the table. I, we've, we vacation down in South Carolina and Kiawah island all the time. And I looked at him and said, Hey, why not just look at Kiawah island and do a vacation home? And I continued to kind of have, live up here in Cincinnati and down in South Carolina. And the interest rates made that happen and especially the demand it's fascinating how that has opened up some options for people that can't afford it. But let's pivot back and talk about the sectors that have done well. You mentioned them a little bit earlier, which are the most sustainable and will that continue? They continue to do well after the pandemic because I think of two off the bat, like, a ticker DKNG and Peloton where this new normal has benefited them. But will that benefit them when the pandemic is in the rear view mirror? 

Jermal Chandler: Yeah, for sure. Those are two good ones and let's be honest here. I mean, this directly speak to the tech stocks and the entire technology industry, right. I mean, we've seen what has happened in that entire industry and it's been interesting to watch as far as what's going on with those stocks. We've clearly become relying on technology on a global scale, like never before will it continue? I say yes in some areas and no in some others. So we talked about restaurants and the delivery apps as well as e-commerce for retail. So I think that tech is kind of here to stay in my opinion. Then you talk about Adobe and DocuSign. I mean, there were on the rise pre pandemic. Now they've just become too easy not to use. It's almost like they say about Amazon. I mean, once you get on it, it's hard to get off.

Now I believe this could also be the case with digital payments, when you're talking about Square, you know, Venmo, which is owned by PayPal and then Sell, which is owned by a couple of different banks and a partnership. So I think those are kind of, are going to be here to stay. Now, eventually people will wean themselves off of Netflix maybe, right. And possibly by design, when you're talking about other tech like Chip Processors, like Nvidia or AMD or Intel, I mean, those will kind of slow down, maybe like a year and change from now. So I think in some regards, those will, we'll see a little bit of a pull back on those, but you know, some of these other ones are going to be around for a while. And then, like you just mentioned these new kids on the block, Peloton and Draft Kings. I think it all depends on how well they can integrate them into the society, so far I think they're off to a really good.

Patrick: Yeah, I agree. And I think it's, like you said, that's a great point it's kind of the same I think of off the top of my head, Uber or Lyft, you know, there's no longer the cab numbers that you have to have, you know, stored in your phone to call people. And so, that could be a, you know, a paradigm shift right there. 

Jermal Chandler: I totally agree. I mean, Uber and Lyft, like that's one where I, when I used to go to the airport, which has been awhile, I used to drive now I only take Uber and Lyft to the airport.

Patrick: One sector that I am not concerned about, but it does raise an eyebrow is when you talk about, when you said the restaurant sector. How all these companies are struggling to adapt, they adapted very well I think in the summer, when you could just open up a couple of barriers and have outdoor seating. It was cold today for the first time in Cincinnati and I'm sure it's cold in Chicago. You know, when that fall weather that crisp weather starts to hit and people don't want to be outside, they want to be inside watching football. You wonder how these restaurants are going to do because the numbers still say that that's technically not the safest thing to do right now. So I wonder how that sector will maintain until this thing is entirely over. But let's pivot here and talk about select sector indices. Can you tell me more about these because I've heard from, you know, a little birdie that says CBOE has them and so tell me more about them and their potential utility?

Jermal Chandler: Your birdie is correct. So CBOE provides index option products for the 11 sectors of the S and P 500. We call them sector, select sector indices, for those seeking an alternative to ETF options this is probably something that they could look at. Now they provide a larger notional exposure and just like all index options they are casts settle, which is a nice feature. They also, because their index options are subject to the 1256 tax treatment that could provide potential tax advantages amount. You always want to make sure you discuss that with a tax advisor so to give an example, let's just say you own we just talked about real estate, so let's use real estate. So you own a bunch of real estate stocks or some call options [unclear 14:04] and you own those call options, which gives you the right to purchase the index at some point in the future.                                 

Now you don't purchase the index, that's why they're casts settled, right? Let's just say you own some call options or stocks and a month goes by and you feel somewhat overexposed to the sector. You could go and purchase, PUT options on that index, which is the SIXRE, real estate sector index. So that's one way you can hedge yourself or you could also do a trade, you could trade a collar strategy. Which is and if any of you guys want to look this up it's also an interesting thing, this whole idea of a collar strategy. It's something, it's one of the ways that Mark Cuban was able to preserve his wealth, but the strategy is buying a PUT and selling a call. So usually they're a little bit out of the money so you're basically selling that call to finance the PUT purchase, which is the collar strategy.

So it's another way you can hedge some long deltas there that you may have. You could also just outright speculate on any given sector if you want, whether it's the real estate sector or the tech sector by purchasing call options. Now, one of the things we always talk about with call options, as opposed to buying stock, it's a cheaper way to do that. Of course risk reward is a little bit different with purchasing a call than purchasing stock, but that's another thing you can do. You can speculate on a given sector. So there's a number of ways to utilize these sectors to sector indices to your advantage.

Patrick: So, can you pick a few of them and explain to me how their index volatility stacks up against the S and P 500's historical volatility, because obviously that's so important when you're measuring your point of entry. How much are you going to put in and that's, I think step number one, really?

Jermal Chandler: Yeah. I mean it's always good to understand the idea of when you, you know, have like a sector or a, even when you look at like an ETF, ETF for example, let's just say an ETF has volatility that's lower than a single stock because of the fact that it has a bunch of things within it. Same thing with the sector indices in that type of way, you have a bunch of different things that sort of help equal out equalize, I should say the volatility. So to give you an example, let's as opposed to looking at singles, let's just talk about the S and P 500 index versus these different sector indexes. And we're, in this case we're going to compare S and P 500 volatility to the texts sector index, which is SIXT and we'll continue to prepare the real estate sector index SIXRE.

Patrick: Okay. 

Jermal Chandler: So if you look back to when things were really wild this year, which was, I would say March 23rd, which is probably peak panic time during the pandemic. If we look at we're going to compare a 10 day realized volatility, or also known as historical volatility, some people get confused with that they're the same. So 10 day historical volatility and 30 day historical volatility on March 23rd for the S and P 500 index, 10 day was 110% and 30 day was 71%. For the tech sector index, the 10 day was 128 and the 30 day was 82. And then for the real estate sector index, it was 128 for the 10 day and 83 for the 30 day. So as you can see, all 10 days were above a hundred and all the 30 days were above 80 that lets you know, all volatility was high at the time.                                 

So that's, you know, not surprising now, let's look at round June because I always look at that time period when I'm looking back now, because June eight was this time where optimism was beginning to really become high about coming out of the pandemic. And we had the first, I think jobs report that week or the week, the Friday before, which was really positive. And so people were very happy as far as things were going. We had a huge run in the indexes for a couple of days there leading up to it and after, and so on June 8th, the S and P 500 index 10 day historical vault was 13%. And the 30 day was 22%. For the tech sector, it was 15% for the 10 day and 23% for the 30 day and then for the real estate sector, it was 27% and 33% for the 30 days.

So what you see there is the real estate sector was still a little high. We hadn't quite seen this rebound in some of the real estate names quite yet. We’ve  seen some, but not to the extent that we saw an overall market and for tech, tech was already starting to assert its dominance at that point in time. So that's also interesting, finally a couple of days ago, when we look at the September 14th, when we look at these same type of numbers for the S and P 500 index, 10 day historical volatility was 29% and 30 day was 18%. Now, before I move forward, I just want to remind people we had a couple of days of a sell-off right, last week. And so that's one of the reasons why you see the 10 day vol being a 29 and the 30 day being an 18.

So more recently we had a little bit of a sell off, volatility went up a little bit, and that's why we see that. When you look at the tech sector, the 10 day historical vol was a 46 and the 30 day was a 31 so a lot more elevated than the S and P 500 index. And then the real estate SIXRE was a 19.9 for the 10 day and the 30 day was a 17.7. So what we see there was that tech sector vol was high, which they got the 19:38  of the sell-off. But overall we see 10 day vols are a little bit higher than 30 day vols. So I think it's, you know, this is an interesting way, like you said, it's a good way from the outset to sort of analyze what's going on in your different area based on what we see from historical volatility. Which again, is the idea of what the moves had done in more recent times over a given time period that's what affects historical volatility. 

Patrick: Yeah, and what I think that hammers home too, is kind of the notion that something like real estate is generally inelastic and not as prone to these peaks and valleys that something as volatile as tech is. And I think it's so important that you put numbers behind those kind of feelings, or just kind of general thoughts, because I think that allows you to go forward and start your investing plan, you know, with some actual empirical data to back it up. And like you said, I just think it's a great way you kind of can dip your toe in with the sector and figure out, okay, how is this working? And then you can kind of weed out individual equities if you want it to go that far. And then of course can pursue options or anything like that. So let's shift over to, you know, the big event looming November 2020 election. How does sector dispersion affect this upcoming event? What's the best way to be prepared as market participants forecast these potential changes to the political landscape?

Jermal Chandler: You have an election this year? No, I'm just kidding.

Patrick: Did you hear actually Twitter hasn't mentioned anything about it at all. It's pretty lame.

Jermal Chandler: Nothing at all, yeah. I mean you know, it's crazy because global equity markets across all asset classes are preparing for this election. I mean, everything that you've look at sort of shows you that there's something coming shout out to Mandy Zu and our friends at credit Swiss who put together a great equity piece a week ago. Discovering vol markets or I should say discussing vol markets around the election because they did a great job of sort of putting this in and encapsulating, all of what's going on. I mean, current implied election vol premium as seen within the VIX futures curve is among the largest on record. And it's elevated compared to historical realized election moves. So you talk about recency bias I mean, it's on a silver platter right there. We have this huge surprising result in 2016, right for the election.   

We have arguably a polarizing president. We have millions that are going to go to the polls and millions that are going to vote by mail. And we have a global health crisis with the COVID-19 pandemic I mean, I'd say that sets the table for some volatility. Oh yeah.

Patrick: Yeah, it's a perfect storm.

Jermal Chandler: So as far as political issues, I mean, you have healthcare, you have immigration, you have climate change, you have the economy and you have foreign policy. Now, remember that trade war you know that the US and China have been wagering for about two years now. Well, the constant talk of like tariffs back and forth. I mean, this could be something that could change meaningfully based on the election, so it can have lasting effects on certain companies, stocks, industries, and ultimately sectors. So the ability to discuss, to conduct a dispersion trade is a nice tool to have in the toolbox. An example of a dispersion trade is when you look to, you know, sell vol or I should say sell volatility in an index and then by volatility in the components or vice versa, I think there's going to be plenty of opportunities to do this type of trade with the election coming up. So hey, it's game on. 

Patrick: Yeah. What sectors do you think in particular will be more sensitive to these events coming up, or that will be more kind of dull to it?

Jermal Chandler: I would say number one and I'm no prognosticator, but I would definitely say number one would be the healthcare sector. I think, you know, you've read a lot and heard a lot over the last few years about the different rollbacks that have happened during the Trump administration that were things that were created during the Obama administration. So, I think healthcare is going to be a huge sector. Should there be a change within the white house or you know, within the Senate or the house? I think that'll be a pretty big one.

Patrick: Yeah, I agree. Well, Jermal, I mean I love talking landscape long-term strategy stuff. Like you've just did it's fascinating to me. So we'll end with a couple of quick hitters and then maybe you can wrap up with like one kind of final concluding statement. Number one quick hitter that I've asked all of my CBOE friends. Why is New York style pizza so much better than Chicago casserole?

Jermal Chandler: I feel like I'm being let in on that question there but...

Patrick: This is got you journalism at iits finest right now.

Jermal Chandler: Well, I think it's better for those who are in New York, but if you're in here in Chicago, baby, you got to go with the deep dish. You know what I'm saying?

Patrick: Yeah. I I've never been to Chicago. So I just, I know I've had.

Jermal Chandler: When the bangle site a bear sometimes. 

Patrick: Yeah, exactly. So actually that leads to my next question. How does one cope with Mitchell Trubisky as your starting quarterback? What are the methods and strategies that you utilize?

Jermal Chandler: You, you're happy on weekends like last weekend. How about that recency bias? You know, you're only as good as your last game, so you're happy on weekends, like last weekend.

Patrick: Alright, yeah. Good, that's a very, that's a political answer here. You can, maybe run for office there or, there you go. Yeah, just jump right in. Well, okay so do you want to wrap up with any kind of concluding statement? Anything you want to plug that you're, that's going on over at CBOE?

Jermal Chandler: Yeah. So, you know, I think it's, we really appreciate you giving us this opportunity to discuss a few things going on in the market and particular sector indices. I think there, they provide people this other tool that you can use when with so many different things to be able to trade. I mean, you have, you know, not only a bunch of different equities, we all know that a lot of people are trading different options these days in their portfolio. And it's a good thing to add, sector indices is just another one more thing to add to your portfolio and understanding them I think, like you said, at the outset, understanding this idea of the different historical volatility within them versus other things in your portfolio. I think that's a good place to start so, take a look at them and see, you know, how they can fit in.

Patrick: Couldn't agree more, well Jermal, thank you for coming on best of luck to the Bears this weekend, and maybe we could post-election, you know, do a part two and talk about what 2021 will look like.

Jermal Chandler: Sounds great to me. Thanks for having me, Patrick. We got to do this again sometime.

Patrick: Absolutely, take care.


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