Pfizer Vaccine Upends the Stock Market
Many of the so-called “stay at home” stocks took a beating at the start of this week. Below, I’ll show you a trading opportunity presented by the reaction to this unexpected turn of events.
On Monday, drugmaker Pfizer (NYSE: PFE) announced successful trial results for its COVID-19 vaccine candidate. The treatment was deemed to be “more than 90% effective in preventing COVID-19.”
To be sure, that is wonderful news. However, I’m surprised that it caught the stock market off guard. We’ve known for weeks that it was coming. The White House Coronavirus Task Force told us repeatedly during the past month that a successful vaccine would most likely be announced before the end of the year.
We also have been told that it may take six months or longer for the vaccine to become widely available. It must be manufactured, distributed, and administered to enough people to achieve herd immunity.
The Pfizer treatment must be administered in two doses. The 90% level of protection from the virus is not achieved until one week after the second shot. That works out to 28 days from when the first dosage is administered.
This week, the stock market reacted as if the virus had been immediately eradicated. It has not. In fact, in the days leading up to Pfizer’s announcement the United States recorded the most new cases of COVID-19.
Oil Stocks Rally
Perhaps most surprising was a nearly 10% jump in oil prices on Monday. Eventually, more people will go back to commuting to their workplaces. But it may be a long time before the global oil supply glut has been whittled down to normal levels.
As you might expect, the major oil producers benefited from the jump in oil prices. Personal Finance portfolio holdings Chevron (NYSE: CVX), Total (NYSE: TOT), and Royal Dutch Shell (NYSE: RDS.A) were each up more than 10% on the news.
Even Marathon Petroleum (NYSE: MPC), an oil refiner, shot up more than 15% that day. In this case, an expected spike in oil consumption more than offset higher input prices for refining raw petroleum into gasoline.
At the same time, one of this year’s biggest stock market winners, Zoom Video Communications (NSDQ: ZM) tumbled 17%. Even after that drop, ZM has still gained more than 500% this year.
A company I wrote about three months ago, Fiverr International (NYSE: FVRR), fell 18%. Fiverr provides an online market for independent contractors and businesses looking to hire them. Similar to Zoom, FVRR is up more than 500% this year even after this week’s decline.
To be sure, those two stocks had become grossly overvalued and were poised to take a tumble. But some of the other companies taking a drubbing this week may not deserve the same fate.
Stay in the Game
For example, shares of computer peripheral hardware manufacturer Logitech International (NSDQ: LOGI) fell 19% as oil stocks soared. Presumably, demand for PC cameras and gaming equipment will nosedive as soon as everyone is vaccinated and can start driving again.
I don’t think that will be the case. First, video conferencing is here to stay. Many businesses have already stated that their work from home policies will permanently change as a result of the coronavirus pandemic.
Second, video gamers won’t stop gaming just because they’ve regain the option of going somewhere. For them, gaming isn’t a temporary indulgence to fill the time stuck at home. It’s a way of life that isn’t going away as soon as COVID-19 disappears.
I don’t know how much lower shares of Logitech may fall. But I do know how to make money no matter which way it goes. The strategy I am about to discuss involves trading put options, but don’t let that dissuade you from giving it consideration.
A put option increases in value when the price of the underlying security goes down. Prices for some of the put options on LOGI expiring in December jumped more than 600% on Monday. That means a lot of investors fear that LOGI may have farther to fall.
Last month while LOGI was trading above $90, I changed it to a “hold” in the Personal Finance Growth Portfolio. But now that it’s trading below $80, I’d be willing to recommend buying it based on its long-term fundamentals.
Let’s Get Naked (with a put option, that is)
However, instead of simply buying the stock, I can sell a “naked” put option on LOGI at the $75 strike price that expires on December 18. The term naked means that I am selling a put option on a stock even though I do not own it.
A few days ago while LOGI was trading near $76, I could sell that option for $3. I get to keep that $3 option premium no matter what happens next. If LOGI falls below $75 by the expiration date, I’ll have to buy it at that price. If LOGI remains above $75 for the next five weeks then the contract expires with no further obligation on my part.
There are two advantages to doing this trade over buying the stock outright:
- The $3 premium equates to an options yield of 4% over a 40-day span, or 36.5% on an annualized basis (straight line, no compounding).
- Because of the premium, my net price for buying LOGI is $72 (the $75 strike price minus the $3 options premium). I’d be happy to own LOGI at that price.
The key to making this type of strategy work is identifying stocks that will continue to perform strongly even after the coronavirus pandemic has been fully contained. Logitech is one of them and there are many others. In future articles, I’ll be pinpointing these opportunities as they arise.
Are you looking for a steady source of income? A source that’s immune to the pandemic and economic ups and downs? Turn to our colleague Amber Hestla.
Amber is chief investment strategist of the premium trading services Income Trader, Maximum Income, Profit Amplifier, and Precision Pot Trader.
Amber can show you how any U.S. citizen can pocket instant cash from a government “income insurance” program. It’s all thanks to an obscure loophole she has unearthed through tenacious research. Intrigued? Click here for details.