Special COVID-19 Investment Analysis – Part 2

Investing during a global pandemic poses unique challenges. Since we are not doctors we don’t want to advise how to stay safe and bring the pandemic under control (it is more important, but there are experts to do that). Nevertheless, we wish to help our users and readers in navigating the turbulent waters that are the markets right now.
This blog is based on an email we sent our premium users to help them build a framework on how to invest in the market. The main takeaway here is that we should aim to increase our risk in the trades as time progresses. We should take low-risk trades right now, and increase it as volatility decreases and there are more known variables in the market.
The was the email:
The past month was very extreme for the financial markets. We saw most of the world indexes drop at the highest speed since Black Monday, we saw the greatest volatility in the oil prices ever, and we see supply shortages in medical equipment and basic supplies. There are elevated levels of fear in the world. It doesn’t help when the media is incentivized to prey on fear to get more clicks and revenue, but this is the world right now.

Even though I’m sure this crisis will pass; I believe that there might be more bad news and market drops soon. Short-term traders can look for short opportunities after the correction, but I’d look for debit strategies as we get a higher profit ratio.

For longer-term traders, I think some companies start to look interesting from a valuation standpoint, and I want to elaborate on that point a bit.
I like Moody’s analysis for exposure to the crisis according to sectors:

Covid Risk analysis
Covid Risk analysis

I think that the higher the exposure – the higher the risk. It doesn’t mean that we shouldn’t take riskier trades – we should definitely do (with strict money management rules) but I think that we should use this as a blueprint:
The higher the risk – the more return we will ask – meaning we would want more margin of safety and upside (be more patient and ask for better prices).
Time – I think that as time passes and there are more knowns in the market the more exposure we can have to those industries.

If I summarize this email and the last one: The blueprint for long term trader should be to ask if the business is going to be hurt in the long term (see the last email/blog post) and start building exposure for lower-risk industries or companies that survived recessions before (KO and GOOG are good examples in my opinion). As time passes, we can start looking for trades in riskier industries (such as airlines, aerospace or travel – DAL, BA, LUV, BKNG are amount my favorites).

* Moody’s sees REIT as a lower exposer industry. I disagree – While it will have lower exposer, it is a highly leveraged industry – so even small vibrations will escalate quickly.

If you’re looking for specific trade ideas, I’d look for selling OTM puts or puts spreads and will use the ‘include symbols’ list to limit the results to stocks that interest you. Click the button to start:

Go to Option Samurai


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