Wednesday, April 8th, 2020

What Stock Options Will Be Useful for a Post-coronavirus Recovery?

 

The stock market has erased all of the gains of the Trump era and eaten into those of the Obama era. The virus threatens to get worse and more and more cases (and deaths) are being reported. Congress is forking out $2 trillion to help workers, support small business, and keep critical businesses in operation for the time being. Looking ahead, the rate of spread will either come under control or not. If so, there will a prolonged but less severe pandemic. If not, it be will horrible but shorter in duration. Either way the virus will burn itself out after infecting half or more of the US and world populations. What can an options trader do to profit from an eventual recovery as well as protect themselves until things start to turn around.

Who Is Getting Hurt and Who Will Recover?

As noted in USA Today, the businesses worst hurt by the virus-caused slowdown are retail, travel, and transportation. Casinos are being shut down as are movie theaters. Disney has closed all of its theme parks. Companies with strong balance sheets and other sources of income in the meantime (like Disney) will take a hit and survive. Without government bailouts, some US airlines could go under or be reduced to penny stock status. Having a sense of who will make it and why should help guide your choices of equities but what stock options will be useful for a post-coronavirus recovery?

What Stock Options Will Be Useful for a Post-coronavirus Recovery?

The first options choice that typically comes to mind when an asset has been beaten down and stands a chance of making a rally is to buy calls. We wrote about this almost a decade ago as the economy was digging its way out of the Financial Crisis. The only risk when buying calls is that you will spend money on the options contract, not exercise it, and lose your money. The upside is that if you choose correctly you will be able to pick up a stock after it has rallied and only pay the depressed price that was current when you bought the contract.

What if the Recovery is Bumpy?

A distinct possibility is that you will believe a recovery is around the corner and then the virus makes a comeback or congress decides to quit dolling out bailout funds. In this case promising stock could just as easily fall as rise. If this is a possibility, a long straddle is a good choice.

In using a long straddle a trader buys both a call and a put on the same stock with the same expiration date. The worst case scenario is that the stock price does not budge and the trader is out the cost of two options contracts.

But, if the market is volatile during a recovery, you can profit from either an upswing or downswing with this options trading strategy. As you consider your options for a recovery, do your homework, wash your hands well, and maintain social distancing!

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