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When we no longer fear that we have entered the twilight of our way of living, a great reckoning will occur.
Many people will look inside themselves and assess their lifestyle and how they acted when most of humanity was forced to hide inside their homes so they werent killed by a deadly virus. This mass introspection will affect all areas of society. Investors will try to identify pandemic-proof companies.
Pharmaceutical companies like Abbott Laboratories (ticker: ABT), Gilead Sciences (GILD), and Regeneron Pharmaceuticals (REGN) should win praise. The scientists and company that discover the cure or vaccine for this virus will be heroes.
Already, investors are hoping that a potential peak in the pandemics death rate means this nightmare may be coming to an end. The stock market has rallied higher in anticipation that the economy soon reopens.
When this happens, Facebook (FB) will probably prosper, much as it has during the crisis. Many people have been using Facebook to communicate with friends and family during weeks of isolation. When the quarantine ends, everyone will almost certainly post even more to Facebook, and its subsidiaries Instagram and WhatsApp, to share the post-quarantine celebration.
As a business, Facebooks conduct during the crisis has been exemplary. It has made $100 million available in cash grants to help small businesses. They can now host fund-raisers, a helpful feature for selling gift cards and organizing community support. The company gave its own employees $1,000 bonuses and announced plans to hire 10,000 more people by years end.
Facebooks leadership has been decisive and humane in the crisis, and it could overshadow longstanding concerns that it is a bully that weaponizes user data to make money and destroy competitors.
Though advertisers are reportedly not spending money to reach people on Facebook, only a fool would discount the companys leading role during the pandemic and what that probably augurs for its financial future.
Facebooks stock is arguably attractively priced, with shares down a hair more than the broader market. They are now down 15.1% this year, compared with a 14.9% decline for the S&P 500 index, and are attractive by various other measures.
We could summon persuasive data to demonstrate that Facebook is poised to benefit from the virus continuing, but we will pass. Everyone hopes, as evidenced by the S&P 500s recent stratospheric rallies, that the pandemic will soon be under control. Of course, no one knows if thats true, and that is reflected in narrower realms such as the options market, where Facebooks volatility is elevated and its shares look battered.
In our disciplinelong asserted here throughout other vicissitudes, including the financial crisisselling high in the options market to buy low in the stock market is often a winning strategy. By selling options, especially cash-secured puts, investors can monetize fear and get paid by the options market to buy stock.
With Facebook stock at $173.73, consider selling the May $160 put for $4.90 and buying the May $180 call for $6.50. The so-called risk reversalselling a put and buying a call with a higher strike price but a similar expirationis designed to catch Facebooks first-quarter earnings report. The date hasnt been announced, but a year ago it occurred on April 24.
For $1.60the trades costinvestors profit from rallies above $181.60, while they are obligated to buy the stock at the put strike price. The great risk is that the stock tumbles on earnings and is far below $160 at expiration. Consider this trade only if you have enough cash to ride out the pandemic.
One day the quarantine will end. This trade expresses the view that Facebook will benefit because it is more integral to societys functioning than perhaps anyone would like to admit.
Email: editors@barrons.com
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Facebook Is Winning the Pandemic. How to Bet on It With Options. - Barron's
