Wednesday, September 23rd, 2020

Stock Options in the Era of Covid-19

June 17, 2020 by Jim Walker  
Filed under Options Trading Education

 

In general, stock option traders are looking for short to medium term profits. Or they are looking to pick up an excellent long term investment for cheap. Trading options can be quite profitable in a volatile market such as we see today during the covid-19 pandemic. First, the stock market crashed and then it recovered. Every bit of positive news sends the S&P 500 up and whenever there is troublesome news it heads down. This raises the question, how do you trade stock options in the era of covid-19?

Where Are the Economy and the Stock Market Going?

Our sister site, ProfitableInvestingTips.com wrote about the likely shape of the economic recovery. It would appear that many investors are expecting a rapid, “V” shape to the recovery such as what happened ten years ago coming out of the Financial Crisis. Anyone who simply invested in the S&P 500 or bought calls on many of the depressed stocks did very well. Unfortunately, most economists expect either a U-shaped or L-shaped recovery is more likely in the covid-19 era. These would be either a prolonged recession before the economy gets better or a permanent reduction in the strength of the US economy. Every hint of progress against the virus or signs of businesses recovering send stocks up and every time there is a bad report about more cases and deaths from covid-19 the market heads down again.

To a large degree, options traders are trading on the news or expected news as much as they are trading on hard evidence that any given stock or index is showing solid signs of improvement or worsening.

Positive Opportunities for Stock Options in the Era of Covid-19

The best things that people can do to prevent the spread of the virus are to wear masks and avoid going out in crowds. This has driven many people to work from home. The beneficiaries of this are tech stocks like Microsoft and Apple. These folks have gigantic cash reserves giving them huge margins of safety. And, they are ideally positioned to provide help in this era and to reap the benefits. Companies like 3M that make masks or other products so necessary in these times and may continue to benefit if covid-19 becomes another “flu” that mutates and returns every year.

The best opportunities for call options on some stocks may have passed as their share prices fell with the rest when the decade-long bull market collapsed. But, as their businesses and profits continued, they have already recovered nicely.

For put options, there are probably still a lot of strong opportunities as the market gets buoyed up by snippets of positive news only to get driven down as the reality of this being a long slog sets in.

A useful article in the St. Louis Dispatch noted that penny stocks could be dangerous investments at this time. Their point is that many investors will be looking for the cheapest stocks with the mistaken belief that these will show the greatest gains as things get better. But, the fact is that cheap stocks are usually cheap for good reasons and often get worse or disappear instead of rising to the top. Options traders may find it useful to buy puts on some of the travel and airline stocks which are as likely to collapse as to hang on.

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