Goldman, Sachs & Co. analysts John Marshall and Katherine Fogertey identify the most attractive stocks to overwrite for February, looking at companies like FSLR, 3D Systems Corporation (NYSE:DDD), IRM, and SSYS, among others.
Overwriting attractive on equity outperformance vs credit
Over the past month, equities have risen about 3% more than would be expected relative to the credit market. In the past 3 years, such outperformance has been a good predictor of a plateau in the equity market until credit catches up. When combined with the recent rise in single stock implied volatility we expect to see an increase in overwriting activity. Since December expiration, we estimate the average US stock with liquid options is up 1.8%; overwriting with 10% OTM 1-month options has outperformed by 19bps, while put selling outperformed by 44bps. Option selling in the Technology sector continues to be attractive in our view as average 1 month implied volatility is 26, the highest among the sectors and
in its 90th percentile over the past year.
3D Systems Corporation (NYSE:DDD): Overwriting ideas this week: IRM, DDD, FSLR, SSYS
We screen for the top 1-6 month overwriting candidates based on our 16- year study as well as our analysts’ fundamental ratings and price targets. We estimate overwriting larger-cap stocks that have high implied volatility but are not reporting earnings in the month added more than 500bp annually from 1996 to 2011 (study overview, p. 8-10). We identify the most attractive stocks to overwrite for February expiration based on this screen (p. 3). For 3-6 month overwrites, we highlight the top 50 opportunities based on our analysts’ price targets as well as the top 50 put selling candidates based on our analysts’ estimates. Covered call sellers risk limiting upside to the strike price plus the option premium and dividends. Put sellers commit to buying shares at the strike price.